Effect of Abnormal Credit Supply on Selected Macroeconomic Variables of Ecowas Countries: 1993-2021

Peterson Ozili

MPRA Paper from University Library of Munich, Germany

Abstract: The objective of the study is to examine the effect of abnormal credit supply on selected macroeconomic performance indicators in ECOWAS countries. In the study, abnormal credit supply refers to the abnormal (or sudden, unexpected) decrease or increase in the level of credit supply in the economy at a particular period in ECOWAS countries. The study used data for ECOWAS countries obtained from World Bank database during the 1993 to 2021 period. The model specification expresses macroeconomic performance as a function of abnormal credit supply and controlling for the effect of banking sector characteristics, institutional factors, and central bank size on macroeconomic performance. The empirical results showed that large abnormal cuts in credit supply decreases GDP growth in ECOWAS countries. The empirical results also show that large abnormal cuts in credit supply leads to a significant fall in the standard of living (or GDP per capita) in ECOWAS countries. The empirical results also show that abnormal increase in credit supply lowers the rate of inflation in ECOWAS countries. Finally, a uni-directional relationship between abnormal increase in credit supply and the rate of inflation was found. The primary contribution to knowledge of this study is its extension of our understanding of the role of credit supply for better macroeconomic outcomes. The study provides new knowledge by focusing on the impact of abnormal credit supply on selected indicators of macroeconomic performance in the context of ECOWAS countries - a context that has not been examined in the economic literature. The findings are useful to monetary policy decision makers in their evaluation of the optimal amount of credit supply that is needed to support economic growth in ECOWAS countries. The policy implication of this result is that large abnormal cuts in credit supply is undesirable because it hinders economic growth and has an undesirable welfare effect on the standard of living in ECOWAS countries, thereby worsening economic output per person. The recommendation of the study is that policy makers in ECOWAS countries should be cautious when introducing economic policies – whether fiscal policy, monetary policy or regulatory policy – so as not to introduce economic policies that will trigger financial institutions to unexpectedly decrease credit supply which can ultimately hinder growth and macroeconomic performance.

Keywords: Credit; Loan; Economic Growth; Inflation; Unemployment; ECOWAS; Nigeria; West Africa (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G20 G21 G23 G28 (search for similar items in EconPapers)
Date: 2023-09-30
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