The Influence of Credit Growth on Output Growth in Iceland: A VEC Model Approach

In this thesis we used a Vector Error Correction (VEC) model to analyse whether changes in credit growth have a significant effect on output in Iceland using monthly data for the period 1997-2017. Both our results from the error variance decompositions and the impulse response functions suggest that...

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Bibliographic Details
Main Authors: Vestmann, Andrea, Viebrock, Janina
Format: Other/Unknown Material
Language:English
Published: Lunds universitet/Nationalekonomiska institutionen 2018
Subjects:
output growth
credit growth
Iceland
VAR model
VEC model
credit view
macroprudential policy
Business and Economics
Online Access:http://lup.lub.lu.se/student-papers/record/8949442
Description
Summary:In this thesis we used a Vector Error Correction (VEC) model to analyse whether changes in credit growth have a significant effect on output in Iceland using monthly data for the period 1997-2017. Both our results from the error variance decompositions and the impulse response functions suggest that changes in credit and exports have a large impact on Icelandic output. We conclude that changes in credit activity do affect Icelandic macroeconomic variables. There is a statistically significant relationship between output and credit growth and hence the ‘credit view’ is supported in the case of Iceland. This highlights the importance of implementing macroprudential rules that can minimize severe economic fluctuations caused by excessive credit growth.

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