THE CREDIT GROWTH AND ECONOMIC ACTIVITY IN BOSNIA AND HERZEGOVINA

Abstract

We have analyzed the impact of credit growth on economic activity in period before, during, and after credit crunch in Bosnia and Herzegovina i.e. from Q12007 to Q42012. In this period, credit growth on average proved itself as a good signal of economic contraction and economic slowdown. This is the first time that interdependence between credits and GDP in Bosnia and Herzegovina was established trough the receiver operating characteristic methodology and trough receiver-operating characteristic. The main research finding shows that level of credit growth is a good signal of substantial decrease of economic activity in case when credit growth was previously very high. The regulators and banking supervision should not allow excessive growth, because during and after credit crunch contraction of economic activity can happen even when credit growth rate is relatively high. This research is one of the first steps in creating early warning system for Bosnian economy by using banking sector data and national accounts data.