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Abstract
The article was conducted to assess equilibrium level of credit-to-GDP ratio. The research is based on the fundamental macroeconomic indicators and international comparisons of the similar sized economies. In addition, the paper presents a set of econometric methods for estimating the influence of supply and demand factors on the dynamics of credit aggregates. Namely, the Error Correction Model and Hodrick-Prescott filter were applied, since they are suitable tools to assess long-term relationships between credit demand and supply as well as they can adequately assess the level of credit in the economy. In conclusion, it appears that the current level of this indicator in Kazakhstan is likely to be close to equilibrium or slightly lower it.
JEL classification numbers: E51, C23, G01
Keywords: Credit, Equilibrium level, Error correction model, Hodrick Prescot filter.
1 Introduction
The credit to GDP ratio is useful tool to assess the adequate level of credit in the economy. In general, credit leads to an increase in spending, also increasing income levels in the economy. This leads to higher GDP and thereby faster productivity growth. If credit is consumed to purchase productive resources, it helps to economic growth and increases the national income. Credit further leads to the creation of debt cycles (Mitchell A. and Raghuram G., 1994).
A deep understanding of the actions taking place in credit market is important for the development and implementation of effective monetary and macro prudential strategies. Shocks in the demand and supply of loans have different effects on economic activity and, therefore, require a different reaction from the central banks (ECB, 2009). It is necessary to properly identify these shocks and determine reasons of their occurrence. On the one hand, a reduction in the central bank's key rate will stimulate aggregate demand, which will lead to an increase in the value of companies as well as in the volume of bank lending. On the other hand, additional access of credit institutions to the refinancing tools will be required, in order to level out the supply limitation and satisfy the demand for loans from solvent borrowers (Rousseau P. and Wachtel P., 2011).
In addition, credit to GDP ratio is an important indicator to assess stability of the banking system and can serve as a leading...