Revisiting the Credit-Output Nexus in India: A Macro and Sectoral Analysis
Sanjay Kumar Hansda,
Dirghau Keshao Raut,
Bikash Maji and
Anoop K. Suresh
Macroeconomics and Finance in Emerging Market Economies, 2021, vol. 14, issue 3, 258-277
The study examines the inter-relationship of credit and output and brings to the fore the critical role of bank credit in financial intermediation. Applying Johansen’s cointegration and vector error correction model (VECM), the study finds long run association between credit and output at the aggregate level during 1997-98:Q1 to 2019-20:Q2 as also at the sectoral level for agriculture and services during 2007-08:Q1 to 2019-20:Q2. The Gregory-Hansen test revealed break in 2013-14:Q2 in the relationship between overall credit and output possibly reflecting the absence of long-run relationship for capital intensive sector such as industry and manufacturing. The coefficient measuring long-run impact of overall credit on output in the economy showed an upward movement after the break – reflecting the combined impact of structural reforms undertaken in the banking system and availability of spare capacity. Thus, notwithstanding hiccups observed sometimes, the underlying relation of credit and output appears strong and sustained.
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