Front Matter Page

African Department

Contents

• Summary

• I. Introduction

• II. A Note on the Credit View Under Central Planning

  • 1. Two preconditions of the credit view

  • 2. The role of credit in Czechoslovakia

  • 3. Credit targeting

• III. Is There a Long-Term Relationship Between Credits and Production?

  • 1. Data and time series properties

    • a. Data sources

    • b. Time series properties

  • 2. Cointegration

• IV. Granger Causality Results

  • 1. Directions of Granger causality

  • 2. Exogeneity tests

  • 3. Contribution of credit shocks to the business cycle

• V. Concluding Remarks

• Tables

  • Table 1. Dickey-Fuller and Augmented Dickey-Fuller Tests for the Presence of a Unit Root, 1976:1-1990:IV

  • Table 2. Johansen Test Statistics for Cointegration, 1976:1990:IV

  • Table 3. Cointegrating Vectors from the Johansen Procedure and Engle-Granger Tests of Cointegration

  • Table 4. Directions of Granger Causality

  • Table 5. Significance Levels of Granger Causality Tests: Production “Causes” Credits

  • Table 6. Significance Levels of Granger Causality Tests: Credits “Cause” Production

• Charts

  • Chart 1. Credits and Industrial Production

  • Chart 2. Impulse Response Functions

• Appendix

• References

Summary

This paper examines the effect of credit policies on industrial output fluctuations in the former Czechoslovakia. To justify the existence of the so-called credit view of the business cycle, assumptions of credit endogeneity and neutrality under central planning are revisited. Even prior to the economic reform launched in 1990-91, the Czechoslovak Monobank was able to regulate the credit supply and its credit policy changes were neither fully nor automatically offset by fiscal transfers, changes in prices, arrears, and the like.

Using quarterly data for 1976-90, the paper employs cointegration and vector autoregression techniques to establish long-term relationships and directions of Granger causality between various measures of monobank credits and industrial output.

The results confirm the contribution of credit shocks to the business cycle, especially during 1985-90. Different measures of credit to the economy and industrial production are cointegrated; moreover, noninvestment credits are weakly exogenous with respect to industrial output. It is found that noninvestment and total credits are Granger-causing industrial production and that industrial production is Granger-causing investment credits. However, the impact of credit shocks is short-lived.

Even though the potency of credit supply effects changed over time, the paper’s results support the hypothesis that the initial squeeze in (real) credit supply in 1990 (and perhaps beyond 1990) might have contributed to the decline in (real) industrial output. In 1989-90, however, the total impact of the credit shock was relatively small. The paper concludes, based on the past credit-output responses, that the production decline in 1990-92 was likely generated and propagated through some other, noncredit, mechanisms.