Credit Market Development and Economic Growth

Abstract

The issue of causal relationship between credit market development and economic growth is very crucial in an emerging country like India especially in the after-math of the global credit crisis. A developed credit market efficiently allocates resources for higher economic growth. Thus, realising the importance of credit market development, this study examines the direction of causality that runs between credit market development and the economic growth in India for the period 1980 to 2008. The ADF unit root test indicates that the variables of the study are stationary in their second differences. The Johansen Cointegration test suggests the existence of long-run equilibrium relationship between the variables of credit market development and economic growth. In the VAR framework the application of Granger Causality Test provides the evidence in support of the fact that credit market development spurs economic growth. The empirical investigation indicates a positive effect of economic growth on credit market development of the country.