Determinants of Bank Credit in Small Open Economies: The Case of Six Pacific Island Countries

Abstract

This paper examines the changes in bank credit to private sector across six economies in the South Pacific. An extensive time-series and cross-country panel data allow us to draw new and broader lessons compared to existing research, which have tended to focus mostly on single countries with shorter time periods. Results show that rising average lending and inflation rates may be detrimental to credit growth, and that deposit and asset size contribute positively to credit growth. Results also indicate that stronger economic growth leads to higher credit growth. A number of policy implications emerge and are also discussed.

Keywords: bank private sector credit, South Pacific, cross–country analysis

JEL Classification: G21, E44, E51, C23