Economic Growth, Financial Depth and Lending Rate Nexus: A Case of Oil Dependant Economy

Abstract

This research empirically investigates the long and short run causal relationships between economic growth, financial depth and lending rate in the unique economic setup of Saudi Arabia where 92% of total GDP comes from oil exports. Study uses two proxies for financial depth namely liquid liability indicator and banks claim to the private sector to GDP ratio, while economic growth is measured by real GDP per capita. This study intends to get answers for such questions as, if financial depth effects or causes economic growth in an oil based economy, and does lending rate have any relationship with financial depth or economic growth. Using the Johansens co-integration, Granger causality and Vector Error Correction Model (VECM) the study finds a single co-integrated equation which establishes a long run relationship among the variables. Finding suggests that financial depth causes lending rate which is in contradiction with most of the available literature; the study tries to explain this type of causality under the present circumstances. Furthermore no short term significant relationship exists among the variables as reflected by the results of the Wald Test, that is due to the unique political and economic setup under consideration.