Annex I. Impact of Credit Growth Shock
Annex II. Impact of Real GDP Growth Shock
Prepared by Kimberly Beaton.
The commercial (which includes services) interest rate is calculated as the simple average of the commercial interest rate charged on new lending by foreign and Panamanian-owned banks. Commercial lending represents about 40 percent of new credit.
Unit root tests confirm that all variables are stationary in order I(0).
Ideally, the model would also include the unemployment rate to reflect the fact that high unemployment is likely to lower borrower repayment capacity and lead to a deterioration in asset quality. However, there is no quarterly data on unemployment dynamics available for Panama.
Impulse responses are orthogonalized, using the Cholesky decomposition to identify the orthogonal shocks. The variables are included in the VAR in the following order: the NPL ratio, real GDP growth, inflation, and the commercial interest rate. This ordering reflects our assumption that economic activity affects asset quality with a lag, while asset quality has a contemporaneous effect on economic activity, largely through credit. Estimation results are broadly consistent to the ordering of the variables.
The negative correlation with economic activity and positive correlation with interest rates is not statistically significant.