TITLE:
Can Bank Credit Explain the Economic Miracle of Mauritius? Policy Lessons for the Central Bank
AUTHORS:
Amit Achameesing
KEYWORDS:
Bank Credit, Monetary Policy, Economic Miracle, Economic Growth, RGDP, Finance, Financial Development, TVC Model, Total Effects, QTC, QTDC
JOURNAL NAME:
Open Journal of Business and Management,
Vol.11 No.4,
July
31,
2023
ABSTRACT: This paper starts with an estimation of the effects
of bank credit on economic growth in Mauritius. Existing empirical studies in
Mauritius have used fixed coefficient models (see Jankee,
2006; Seetanah, 2008; Nowbutsing et al., 2010) to estimate the
effects of bank credit on economic growth. However, the relationship between
bank credit and economic growth may have changed over time because of different
financial policies adopted in the country since independence in 1968. In that
respect, because the effect of policies on the relationship between finance and
growth may not be constant, we use the Time-Varying Coefficient model of Swamy and von zur Muehlen (2020) to estimate the
time-varying total effects of bank credit on economic growth from 1970 to 2019.
The Time-Varying Coefficient model of Swamy and
von zur Muehlen (2020) is superior to extant
models using fixed and variable coefficients because it estimates total effects
and does not ignore the correlation between the error term and the explanatory
variables, and hence also considers the indirect effects of the explanatory
variables on the dependent variable. The results show a non-linear relationship
between bank credit and economic growth with a non-monotonic decline of the
total effects of the former on the latter from 1986 onwards. In the second part
of the paper, to gain further insights into the reasons behind that
non-monotonic decline, we introduce a novel theory in Africa known as the
quantity theory of disaggregated credit and use its methodology to disaggregate
total bank credit into two types namely, bank credit for GDP transactions and
bank credit for non-GDP transactions before estimating the total effects of the
former on economic growth. The best model of the total effects of bank credit
for GDP transactions on economic growth shows that bank credit for GDP
transactions, in particular to investment in machines (IM), or more broadly to
manufacturing, spearheaded high growth rates during the country’s miracle years
in the 1980s. In fact, during the period 1973-1993, the Bank of Mauritius had a
system of credit guidance in place, which also coincided with the strong
effects of bank credit for GDP transactions on economic growth during those
years. The removal of this policy instrument from the monetary policy toolkit
of the Bank of Mauritius as from 1993 coincided, too, with a decrease in
average real economic growth. A corollary to the results is that policies that
guide bank lending towards productive investment can be very effective in
stimulating economic growth, more so than conventional interest rate policies,
to which credit guidance can act as a complement and not necessarily as a
substitute.