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Volume 73, Issue 3


Investigating the Causality between Bank Profitability and Economic Growth: Evidence from Central and Eastern Europe

Bartasek Petkovska, Katerina; Kjosevski, Jordan; Petkovski, Mihail; Stojkov, Aleksandar

Year: 2023   Volume: 73   Issue: 3   Pages: 303-327

Abstract: This article investigates the impact of bank profitability on economic growth for a sample of 16 countries from Central and Eastern Europe during the period from 2000-2021. While low bank profitability is considered a risk for economic growth, the extent to which higher levels of profitability are conducive to growth remains an open question. The remarkably consistent empirical results obtained using multiple econometric techniques uncover a statistically and economically significant positive relationship. A one percent increase in banks’ return on assets is associated with higher economic growth in the range of 0.625 and 0.635 percentage points. When richer dynamics of bank profitability are explored, the impact of past realisations of bank profitability on growth does not endure in the long run. We also performed a battery of country-specific tests to examine the bidirectional causality between bank profitability and economic growth in the selected countries.

JEL classification: G21, O16, O40

Keywords: bank profitability, economic growth, Central and Eastern Europe, panel analysis

DOI: https://doi.org/10.32065/CJEF.2023.03.04

RePEc: https://ideas.repec.org/a/fau/fauart/v73y2023i3p303-327.html

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