Download The Bank-Economic Growth Nexus: Case of Palestine 1994 – 2011

The Bank-Economic Growth Nexus:
Case of Palestine 1994 – 2011
Ahmad Asad* and Bukhari Sillah**
It is hypothesized in this research that financial development and economic
growth have bi-directional relationship. As the financial sector develops and
expands credits and funds to finance investments that go into forming capital
and eventually productive capacities in the economy the real economic
output will expand leading to high wages, profits and income. But as output
expands in terms of high wages and profits savings rise and more productive
investments become profitable demand for credit increases and
consequently the financial sector will be enhanced. In modelling this
relationship, we assume that the financial sector is represented by the
banking sector alone, which is divided into Islamic banking and conventional
banking systems. The savings in the economy are the bank deposits, and
the investment is financed by the bank credit expansions. We represent the
economic activity by per capita GDP and per capita gross investments, and
the banking activity is represented by bank credits to private sector, per
capita bank assets and per capita bank liabilities. The relationship is
estimated using the vector Autoregressive model assuming that the direction
and the erogeneity of the variables cannot be predetermined. The VAR
model will process the variable decompositions that show how a shock to
one variable is accounted for by the variable itself and the other variables in
the model. It alsohelps interpret the responses of economic growth to the
impulses or shocks of the banking variables and vice versa. The magnitude
and the time span of the responses can be determined as well. The bidirectional hypothesis is tested using the Granger information content
method.
*Dr.Ahmad Asad
[email protected]
BIBF
**Dr.Bukhari Sillah
[email protected]
King Saud University