Munich Personal RePEc Archive

Lead-lag relationship between domestic credit and economic growth: the case of Singapore

Samad, Fadillah and Masih, Mansur (2016): Lead-lag relationship between domestic credit and economic growth: the case of Singapore.


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The paper evaluates the causal relations and dynamic linkages between Economic growth proxied by real GDP per capita and four other macroeconomic and financial variables namely Gross Domestic Savings as a percentage of GDP, Domestic Credit to Private Sector as a percentage of GDP, Inflation and Real interest rates. The analysis relies on a time series technique, in particular, cointegration, error correction modelling, variance decomposition and a LRSM (Long-run structural modelling) technique to overcome limitations found in the former and seeking to quantify the theoretical relationship among the variables. The empirical results we obtained bear various implications on the issues of direction of causality and long term stability of dynamic linkages between macroeconomic and financial variables. The presence of cointegration between economic growth and these variables indicate a long-run predictability of the magnifying or reducing effect of economic growth. We find evidence that the supply leading condition is applicable to Singapore except if it is being proxied by Gross Domestic Savings instead of Domestic Credit to Private Sector as being used in this paper. We are aware that these variables are used interchangeably as a proxy for financial development. Subsequently, this would then suggest that Singapore is still at its early stage of economic development if following the supply-leading and demand-following hypothesis envisioned by Patrick (1966). This may appear as contradicting one’s intuition as Singapore being a high income economy, will most likely be in its later stage of economic development vis-a-vis a demand following condition. In addition, we find evidence that Domestic Credit to Private Sector seems to be the least influential in affecting growth, in contrast, Gross Domestic Savings appear as a better option in driving growth in this economy. This finding is in line with Romer (1986), who points out that permanent increase in growth can be achieved by higher savings and capital accumulation. Therefore the potential rate of growth of output for Singapore can be significantly enhanced by pursuing an active policy of sound financial sector development, particularly focusing on ways to promote savings in contrast to leveraging.

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