Examining the relationship between banking loans to private individuals growth rate and personal consumption growth rate in Croatia – the cointegration approach
Examining the relationship between banking loans to private individuals growth rate and personal consumption growth rate in Croatia – the cointegration approach

Summary/Abstract: The main hypothesis of the paper states that banking loans to private individuals growth rate correlates with the personal consumption growth rate in Croatia. Following the Engle-Granger cointegration and Johansen cointegration approaches on yearly data samples from 1996 to 2012, we found banking loan to private individuals annual growth rate and personal consumption annual growth rate in Croatia were cointegrated. According to estimates, there is empirical evidence for statistically significant, long-run and short-run levels of banking loans to private individuals growth rate having an effect on the personal consumption growth rate in Croatia. Given the low competitiveness of the domestic economy, the research results raise questions regarding the sustainability of a banking business in Croatia which is mainly oriented toward lending to private individuals, and the potential need to update banking regulations in Croatia. We found evidence of debt-financed consumption. In addition, the research results further illustrate the sensitivity of cointegration methods to deviations from the pure unit-root assumption, since unit-root tests cannot easily distinguish between a unit root and close alternatives.

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