The Effect Of Bank Credit And Price Fluctuations On Economic Growth

Since the reform and open policy, China's economy has kept a fast developing momentum with an average growth rate of 9 percent each year. Many scholars have conducted some deeply researches about the resource of Chinese economic growth, and made some significant contribution to the theory of economic growth. This paper focuses on the effect of bank credit and price fluctuations on economic growth, and analyzes the correlation and Granger cause relationship between bank credit, price and economic growth through theoretical and empirical methods.Under the influence of the financial crisis, China adopted the proactive fiscal policy and loose monetary policy. Since November 2008, the scale of credit has an abnormal expansion trend. Whether the massive growth of China's bank credit has an obvious effect on promoting the economic growth? Does the credit expansion have a sustained impact on economic growth? At the same time, what about the relationship between price fluctuations and economic growth?In this paper, we start our research based on the reality of China's macroeconomic and financial environment. We conduct an empirical study on the relationship between bank credits, price fluctuation and economic growth with VAR model and the data from January 2000 to November 2010. Firstly, we used Johansen's cointegration test methods and the vector error correction (VEC) model to analyze the impact of credit scale and price level on economic growth. Then we analyzed the impulse response between the variables based on Granger causality. The results show that: (1) There is a long term cointegration relationship between GDP and credit scale and price. (2) There is bidirectional Granger causality between bank credit and economic growth. The bank credit has a promotive effect on economic growth, and the economic growth promotes the growth of credit at the same time. Economic growth is Granger causes price level, but price level is not the cause of economic growth. It shows that China's rapid economic growth will lead to price rises. (3)There is a significant positive impulse response of the bank credit to the growth of economy, and bank credit has a large contribution to economic growth. However, price level has a weak impulse response on economic growth and its contribution is small. Finally, we pointed out that, large scale of bank credit played a great role in promoting economic growth. But as well as the substantial increase in credit stimulating investment and increasing consumer demand, it will lead to price rises and strengthen potential inflation. So commercial banks are supposed to reasonably control the pace of loan supply, and should focus on adjusting and improving the structure of commercial bank credit, in order to maintain a balanced and sustained economic growth.