Non-governmental credit in Romania: a VECM-based approach

The aim of this paper is to study the evolution of the Romanian credit market between 2000 and 2012 by using a VECM (vector error correction model)-based) approach. A vector of four variables is selected: non-government credit, index of industrial production, stock market capitalization and lending rate, which are considered basic determinants of credit market from the demand side, according to economic theory. All series show clear I (1) behavior, demonstrated by the classical unit root tests. As a consequence, we follow the Johansen procedure to fit and calibrate a VEC model, which accurately describe both the short run and long run dynamics of the variables. Based on preparatory steps and further validation, two cointegration relationships are found. One of them is interpreted as the long-term equilibrium on the demand-side of the market, and the other one as the long-term equilibrium between the level of economic activity and the financing sector. Also, impulse response functions to innovations for each variable, together with their economic meaning, are given. The non-governmental credit seems to be unaffected by a shock in lending rate, one possible explanation being the prevalence of foreign currency denominated credit and the inelasticity of credit demand to variations in lending rates, due to exogenous factors.