ABSTRACT
In this chapter, we add to the existing literature on financial development and economic growth by introducing the credit-growth framework for SAARC countries. Specifically, we examine the business cycle and financial cycle interactions under the time-varying framework for Bangladesh, India, Nepal, Pakistan, Sri Lanka and China. The chapter also sets the conceptual ground for subsequent chapters dealing with financial integration between SAARC countries. The basic foundation of this chapter is based on the role of credit expansion in the economy. As the financial landscape of SAARC countries is dominated by banks, it is important to examine the relationship between bank credit-based financial cycle and the business cycle of Bangladesh, India, Nepal, Pakistan and Sri Lanka under the time-varying framework. We find that the financial cycle precedes the business cycle for SAARC countries except for Nepal, implying that the financial development in this region is growth dependent. However, the credit cycle leads the business cycle in China. We also find government debt and interest rate as macroeconomic and mobile subscribers and the number of bank branches as major indicators of credit-growth interactions.
