Bank credits and non-oil economic growth: Evidence from Azerbaijan

• Published in: International review of economics & finance 2013-06, Vol.27, p.597-610
• Main Authors: Hasanov, Fakhri, Huseynov, Fariz
• Format: Article
• Language: English
• Subjects: Azerbaijan; Bank loans; Bounds testing approach; Cointegration; Economic growth; Economic models; Financial development; Macroeconomics; Non-oil economy; Studies; Transition economies
• ISSN: 1059-0560; 1873-8036
• DOI: 10.1016/j.iref.2013.02.005

We examine the impact of bank credits on non-oil tradable sector output using aggregate data from Azerbaijan. We apply ARDL Bounds Testing approach, Engle–Granger two-step methodology, and Johansen's approach while correcting for small sample bias to test for cointegration and construct error correction models. Results from all three approaches are similar indicating that bank credits have a positive impact on non-oil tradable sectors output both in the long- and short-run. Short-run deviations are corrected to the long-run equilibrium within one quarter. Our results are useful for the macroeconomic policy makers and contribute to the literature that studies the relationship between the financial sector development and economic growth in the resource driven small open transition economies. •We apply three cointegration methods with small sample bias correction.•1% increase in bank credits causes 0.36% increase in the long-run non-oil output.•The short-run impact of bank credits on non-oil output is 0.65%.•88% of short-run deviations converge to the long-run equilibrium in one quarter.