Foluso Abioye Akinsola and Sylvanus Ikhide
This paper aims to examine the relationship between commercial bank lending and business cycle in South Africa. This paper attempts to know whether commercial bank lending in…
Abstract
Purpose
This paper aims to examine the relationship between commercial bank lending and business cycle in South Africa. This paper attempts to know whether commercial bank lending in South Africa is procyclical.
Design/methodology/approach
The model assumed that the lending behaviour is related to the business cycle. In this study, vector error correction model (VECM) is used to capture the relationship between bank lending and business cycle to accurately elicit the macroeconomic long-run relationship between business cycle and bank lending, as some banks might slow down bank lending due to some idiosyncratic factors that are not related to the downturn in the economy. This paper uses data from South African Reserve Bank for the period of 1990-2015 using VECM to understand the extent to which business cycle fluctuation can affect credit crunch in the financial system. The Johansen cointegration approach is used to ascertain whether there is indeed a long-run co-movement between credit growth and business cycle.
Findings
Results from the VECM show that there are significant linkages among the variables, especially between credit to gross domestic product (GDP) and business cycle. The influence of business cycle is seen vividly after a period of four to five years, where business cycle explains 20 per cent of the variation in the credit to GDP. South African banks tend to change their lending behaviour during upturns and downturns. This result further confirms the assertion in theory that credit follows business cycle and can amplify credit crunch. The result shows that in the long run, fluctuations in the business cycle can influence the credit growth in South Africa.
Research limitations/implications
The impulse analysis result shows that the impact of business cycle shock is very persistent and lasting. This also demonstrates that the shocks to the business cycle result have a persistent and long-lasting impact on credit. This study finds that commercial bank lending in South Africa is procyclical. It is suggested that the South African economy needs forward-looking policies that will mitigate the flow of credit to the real sector and at the same time ensure financial stability.
Originality/value
Most research papers rarely distinguish between the demand side and supply side of credit procyclicality. This report is presented to develop an econometric model that will examine demand side procyclicality. This study adopts more realistic and novel methods that will help in explaining the relationship between bank lending and business cycle in South Africa, especially after the global financial crisis. This report is presented with a concise and detailed analysis and interpretation.
Details
Keywords
The purpose of this paper is to estimate the bond market linkages between emerging markets (EM) and advanced markets (AM) yields by estimating yield equations for EMs as a…
Abstract
Purpose
The purpose of this paper is to estimate the bond market linkages between emerging markets (EM) and advanced markets (AM) yields by estimating yield equations for EMs as a function of AM yields and illustrating the quantitative macroeconomic effects on EMs of global yield shocks in a multi-country dynamic stochastic general equilibrium modeling model.
Design/methodology/approach
The research used a monthly sample of 45 advanced and EM economies covering the period 1998Q1 to 2010Q6. In this paper, the authors have shown that, indeed, there is a spillover effect from AD to EM countries and that most transmission channels, although they vary in significance, are all economically relevant. The main results of the paper underline the importance of international spillover across countries in the financial market. The strongest international transmission of shocks to EM is from the USA and the UK.
Findings
The authors find evidence that shocks in the volatility index and commodity fuels have a positive and significant impact on EM bond yield. Moreover, shocks in three-month US treasury bills, credit default swap, the London gold price and the Brent petrol price have a significant negative impact on EM bond yield. Finally, the result shows that global external shocks are found to be significant in determining bond yield and causing spillover into the EM.
Originality/value
These findings are especially important for policy makers in understanding the transmission of shocks in the bond market across different countries, as well as for risk management.