Credit growth in post-crisis recovery: empirical evidence from the Western Balkan countries

Veselinović, Nevena and Radonjić, Ljubivoje (2018) Credit growth in post-crisis recovery: empirical evidence from the Western Balkan countries. In: Fifth International Scientific Conference "Contemporary Issues in Economics, Business and Management" [EBM 2018]. Faculty of Economics, University of Kragujevac, Kragujevac, p. 365. ISBN 978-86-6091-082-2 !

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Abstract

Numerous empirical tests have been confirmed the importance of the financial sector in generating real economic growth. The reasoning for existence of financial sector development influence on economic growth is simplistic – financial sector uses real assets and therefore affects real economy. Global financial crisis (2007-2008) has led transition countries into recession. The bank credit crunch following the financial crisis may constitute the main constraining factor for real economic activity. Determining the direction of the relationship between the two sectors of the economy is important for the foundation of necessary economic policy. There is a rich body of literature on the theoretical and empirical relationship between financial development and economic growth. The presence of this relationship, as well as its direction, has long been a debated topic among economists. According to the literature, financial development supports economic growth particularly in low and middle income countries. Western Balkan countries have been characterized mostly as low income countries, developing economies with relatively low level of openness to world markets, with a stable banking system. In this paper we attempt to identify the effects of credit activity on economic recovery, with a special reference on domestic banking system. In this regard, we investigate the role of bank credit activity in financing the economic growth of the Western Balkan region including Albania, Bosnia and Herzegovina, FYR of Macedonia, Montenegro, and Serbia in the years 2007-2017. More specifically, the paper analyzes the level of lending activity in relation to GDP growth in observed economies, during and after the economic crisis. The main aim of the research is to identify the importance of credit growth in the conditions of the post-crisis period. The paper deepens literature about the financial intermediation influence on economic growth, pointing out significant degree of causative consequential connection between financial sector and economic results. According to that, our hypothesis starts from the view that economic growth is in strong correlation with the level of credit activity, and vice versa. More precisely, the paper starts from the view that the credit activity follows the level of economic growth, but it is also an important incentive factor for economic development. In this sense, the main goal in this work is to point out the specific connection between the financial and economic aspects in the post-crisis recovery, in particular in the conditions of the countries of the Western Balkans.

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