Economic Models - Convex Optimization

Topic 2
Credit and Income: Co-Integration Dynamics
of the US Economy
Athanasios Athanasenas
Institute of Technology and Education, Greece
1. Introduction
In this study, I seek to identify the existence of a significant statistical relationship
between credit (as commercial bank lending) and income (GDP),
for the US post-war economy, in terms of a contemporary co-integration
methodology.
The main empirical finding regarding the hypothesis that causality, in
the long run, is directed from credit to income, agrees with the “credit-view”.
This can be verified by the the post-war US data. In this chapter, I have
identified a dynamic causality effect in the short run, from income changes
to credit ones. To obtain the results cited here, I have applied a co-integration
analysis. In addition to considering the formulated VAR, I place particular
emphasis upon the stability analysis of the estimated equivalent first-order
dynamic system. Finally, dynamic forecasts from the corresponding error
correction variance (ECVAR) are obtained, in order to verify the validity
of the co-integration vector used.
This study have four sections. Section 2 reviews, in a brief note,
the literature on credit and income growth of the post-war US economy.
Section 3 deals with methodological issues concerning the contemporary
co-integration analysis and the data used. Section 4 presents the econometric
analysis and the empirical results; while Section 5 concludes the
credit-income causality issue, placing emphasis on the stability analysis
of the obtained first-order dynamic system and the forecasts from the
corresponding ECVAR.
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