Effects of Macroeconomic Variables on Bank Credit in Saudi Arabia: An ARDL Bounds Testing Approach to Cointegration

Abstract

The main objective of the paper is to examine the relationship between bank credit and the major macroeconomic variables of Saudi Arabia during the period from 1993 to 2019. An autoregressive distributed lag (ARDL) method was employed to estimate the short-run and long-run effects of the major macroeconomic variables on bank credit. The study revealed that the real exchange rate and money supply have positive long-run effects on bank credit compared to the negative effects of inflation on bank credit. Gross domestic product (GDP) has a negative effect on total bank credit, which is in conflict with the Keynesian view. In the short run, the effect of GDP on bank credit is negative, whereas inflation has a positive influence on bank credit. Based on the findings, the study suggests some expansionary monetary and fiscal policies, such as raising asset prices and lowering the costs of borrowing, increasing spending and cutting taxes to produce budget deficits for stabilizing the financial system and increasing national income to promote sustainable and stable growth in bank credit.