Balkan financial development and its impact on economic growth: Granger causality

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Abstract

This paper examines the relationship between financial development and economic growth for the six countries of the Western Balkan (Albania, Montenegro, North Macedonia, Kosovo, Bosnia and Herzegovina, and Serbia) for the period 2005–2019. To determine the direction of the causality between economic growth and financial development, we employed the vector autoregression VAR approach. Findings indicate evidence for the supply leading theory (Hurlin & Venet, 2008; McKinnon, 1973; Patrick, 1966; Shaw, 1973): financial development causes economic growth overall, especially when private credit was used as the proxy for it. Yet, we observed bi-directional links when financial development was proxied by broad money. Furthermore, interest spread affected economic growth. The findings also indicate a positive relationship between broad money and private credit taken together to GDP growth, but only in the first lag; in the second lag, the inverse effect of broad money and private credit on GDP growth became evident. On a comparative scale, private credit was found to have a bigger impact on GDP than broad money. We also observe that the banking system intermediaries have a significant role in spurring economic growth in the region.

Keywords: Panel Data Models, Financial Sector, Economic Growth, Finance, Balkans

Authors’ individual contribution: Conceptualization — R.V.; Methodology — R.V.; Data Collection — R.V.; Formal Analysis — R.V.; Writing — Original Draft — R.V.; Writing — Review & Editing — B.G.; Supervision — B.G.; Project Administration — R.V.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G2, O5, P2

Received: 15.03.2022
Accepted: 09.09.2022
Published online: 13.09.2022

How to cite this paper: Vangjel, R., & George, B. (2022). Balkan financial development and its impact on economic growth: Granger causality. Journal of Governance & Regulation, 11(4), 59–67. https://doi.org/10.22495/jgrv11i4art6