ity of countries with larger capital inflows to manage credit provision in their economy. Central Bank Political Independence ( `cba` ~~`p`~~ `olitical` ) has a positive effect on the speed of adjustment. Central banks often have the mandate to foster financial stability in addition to their primary objective of price stability and full employment. Greater Central Bank independence can thus lead to a more timely and appropriate response of the Central Bank to excessive credit growth, using either standard monetary or macroprudential tools. The estimated negative coefficient on the Europe and Central Asia (ECA) region dummy ( `eca` ) suggests that ECA countries have been less successful in achieving timely and speedy adjustments of credit to its equilibrium.

## **4.4.4. Correlation between** _β_<sup>ˆ</sup> _gdp_ **and** _β_ ˆ _de f_

The results reported in Table 5 show that the economic and financial development indicators that affect both _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_<sup>ˆ</sup><sup>_de f_</sup> appear to do so consistently with opposite signs. This appears to indicate that the _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_<sup>ˆ</sup><sup>_de f_</sup> coefficients are negatively correlated. This is indeed the case here. The correlation between _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_<sup>ˆ</sup><sup>_de f_</sup> is _−_ 0.81, with a highly significant _t−_ statistic of _−_ 9.50. This is an interesting result that has not been observed or tested in previous cross-country panel studies of credit demand. Note that this is a robust result in the sense that it is not driven by outliers in our sample data. To corroborate this point, we show a scatter plot of _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_<sup>ˆ</sup><sup>_de f_</sup> in Figure 4, with superimposed linear regression and non-parametric Kernel regression fits.<sup>43</sup> The two regression lines are consistent with _−_ a significant correlation coefficient estimate of 0.81 and overlap reasonably well for the 49 cross-sectional observations in our sample.

Recall that the _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_<sup>ˆ</sup><sup>_de f_</sup> are the income and price elasticities estimated from the empirical ECM form of the ARDL model in (11) within the Mean Group estimation framework of Pesaran and Smith (1995). That is, each of the cross-country coefficients _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_ ˆ<sup>_de f_</sup> are obtained from separate ARDL regressions on each individual country. Due to this, it should be clear that the obtained negative correlation cannot be the result of a restriction or a model structure that is imposed on the data. Our conjecture is that frequent or large supply side shocks could be the cause of the negative correlation between _β_<sup>ˆ</sup><sup>_gdp_</sup> and _β_<sup>ˆ</sup><sup>_de f_</sup> . Both GDP and the price level are affected in opposite directions, which could be due to the credit stock being a more stable process than GDP and or the GDP Deflator.

# **5. Conclusion**

This carried out a estimation of credit. It utilized the paper cross-country equilibrium framework of long-run transaction demand for credit, in which parameters of the equi-

> 43The Nadaraya-Watson Kernel regression estimator was used together with the simple plug-in (rule of thumb) bandwidth of Silverman (1986) (see, for example, Pagan and Ullah, 1999, Chapter 3 for the computational details).

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