International journal of research in commerce economics & management

Abstract

The issue of causal relationship between bank credit and economic growth is very crucial in a small open economy like Ethiopia especially during the global credit crisis. The objective of this paper is to examine the long-run relationship between bank credit and economic growth for the period 1971/72 – 2010/11 applying the Johansen cointegration analysis taking into account the maximum eigenvalues and trace statistics tests and Granger casualty tests, respectively. Bank credit is measured by credit to the private sector as a ratio of GDP. Economic growth proxied by Real GDP per capita income. The Augmented Dickey Fuller (ADF) and Phillips and Perron (PP) unit root tests indicate that the variables of the study are stationary in their first differences. The Johansen cointegration test suggests the existence of a significant long-run equilibrium relationship between bank credit and economic growth in Ethiopia. In the Vector Autoregressive (VAR) framework, the application of Granger Causality test provides evidence that there is a unidirectional causal relationship between bank credit and economic growth with the direction from bank credit to economic growth for Ethiopia Thus, the policy implication is that Ethiopia needs to give policy priority to promoting bank credit to the private sector to propel long-run economic growth..