ESTIMATING CROWDING OUT EFFECT OF THE GOVERNMENT BORROWING ON THE PRIVATE CREDIT: EVIDENCE FROM THE MACEDONIAN BANKING SECTOR
ESTIMATING CROWDING OUT EFFECT OF THE GOVERNMENT BORROWING ON THE PRIVATE CREDIT: EVIDENCE FROM THE MACEDONIAN BANKING SECTOR

Summary/Abstract: The relationship between the government borrowing and banks’ lending is unclear from theoretical point of view. It is usually perceived as negative relationship, but there are arguments that it could be positive as well. The two conflicting theories are the crowding out and the Ricardian equivalence whereas the former provides arguments for the negative relationship, while the latter theory may offset this negative effect. Thus, the aim of this study is to detect and quantify the crowding out effect of the real central government borrowing on the private sector real loans provided by the Macedonian banks. However, as it was mentioned above, the crowding out effect might be compensated by the Ricardian equivalence effect. Therefore, the relationship between the real central governmentborrowing and real deposits will be studied as well. The point of the investigating the Ricardian equivalence is to consider whether this effect compensates for the crowding out. This paper utilizes a Vector Error Correction Model (VECM) for investigating the relationship between private loans, deposits and government borrowing from the Macedonian banks. The estimated results indicate that the government borrowing crowds out the private loans, while the effect of the Ricardian equivalence is not large enough to offset the former effect.

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