Bangladesh Bank Training Academy Journal

Abstract

This study examines the impact of bank credit to the private sector on economic growth in Bangladesh from supply side perspectives. The study has applied Johansen co-integration approach and Error Correction Model using the time series data for the period of 1980-2015. Based on the sample data and methodology, we found that there is a positive long run relationship between real private sector credit and real GDP. More specifically private sector credit can alone explain 40 percent of variation of GDP in the long run in Bangladesh. But in short run, real GDP adjusts toward the equilibrium path once the system is shocked. However, in the short run, the adjustment path of real rivate sector credit to maintain the long run relationship is somewhat opposite towards equilibrium. This means that in the short run, changes in real private sector credit cannot contribute positively to restore the long run relationship if there is an imbalance in the system. So, private sector credit should be cosidered cautiously and given priority to productive sectors as unnecessary or unproductive credit to private sector unable to play active role to accelerate output growth.