Credit, income, and causality: a contemporary co-integration analysis

Abstract

In this study, we investigate the macroeconomic fundamental issue of causal relationship between credit and money income, for the US postwar economy, along the lines of the “Credit–View” theorists. In the long-run, we provide significant evidence that credit causes income. Further, we support the view that there is a rather weak causality effect from income to credit, in the long-run. Indeed, we identified that there is a dynamic causality effect in the short-run, from income changes to credit ones. A contemporary co-integration analysis is applied, using the maximum likelihood method. Additionally, considering the formulated VAR, a stability analysis of the equivalent first order dynamic system has been performed. Finally, dynamic forecasts from the corresponding ECVAR (Error Correction VAR) are obtained, in order to verify the validity of the co-integration vector used. It may be useful to mention, that we have not met in the relevant literature, the type of forecasting presented here.