Does financial sector constrain economic growth: The case of Macedonia

Please cite the paper as:
Darko Lazarov, (2018), Does financial sector constrain economic growth: The case of Macedonia, World Economics Association (WEA) Conferences, No. 1 2018, Monetary Policy after the Global Crisis, 19th February to 2nd April, 2018


The main aim of the paper is to investigate whether financial sector is binding constraint to economic growth in Republic of Macedonia by applying adjusted growth diagnostic approach. The results of the analysis shows that the high cost of finance might be one of the most binding constraint to economic growth. There are at least three factors:
1) the small banking sector and low stock market liquidity;
2) low banking competition and ineffective banking intermediation; and
3) high credit risk.
The addressed drawbacks of financial sector limited the bank credit activities to private sector and as a result have negative impact on economic growth. To test this conclusion based on the results of the comparative benchmark analysis we use ARDL (Autoregressive Distributed Lag) model where the determinants of banking credit activities have been investigated by applying quarterly data form 2004 (Q4) to 2016 (Q3). The estimated results indicate that economic growth has positive significant impact on banking private credit activities through the household consumption and private investment. Additionally, the banking deposits and capital adaqusy ratio as a banking specific factors (supply- side factors) have significant influence on banking private credit activities. Finally, the paper found a significant negative impact of non-performing credits on banking credit activities to private sector indicating that ineffective banking intermediation constraints economic growth.

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