Anari, Ali, James Kolari, Seppo Pynnonen and Antti Suvanto* (2001). Further Evidence on the Credit View: The Case of Finland. Applied Economics (forthcoming)
Abstract The present paper provides further empirical evidence on the credit view (i.e., bank credit availability has a positive impact on macroeconomic activity) by investigating the case of Finland. The Finnish economy suffered a severe recession in the early 1990s that was marked by widespread banking crisis and extensive government intervention. Using monthly data for the 1980-1996 period, we estimate unrestricted and restricted vector autoregression (VAR) models with GDP, money supply, consumer prices, bank credit, and exports. We find that, while money supply had the largest effect on economic output, bank credit exhibited a fairly strong effect on output that exceeded price effects for the most part. Exports had little impact on fluctuations in GDP but did help to explain industrial output changes over time. Based on these results, we conclude that there is empirical support for the credit view in Finland. By implication, government intervention in Finland to restore safety and soundness during the banking crisis likely limited further damage to the macroeconomy associated with disruption of credit intermediation services.*The authors are Senior Research Economist, Texas A&M University, Chase Professor of Finance, Texas A&M University, Professor of Statistics, University of Vaasa, and Head of Research Department, Bank of Finland, respectively