Business Cycle Episodes in South Africa

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Secondary Literature Sources

Secondary literature source are those that provide the researcher with scholarly summaries of the research that have been done in the field of interest (Saunders, Lewis & Thornhil, 2003). Important academic journals reviewed include the following: Business Review, Journal of Applied Finance, The Review of Economic Studies, American Bankers Association Journal, Applied Financial Economics, Journal of Applied Econometrics and The Quarterly Journal of Economics. Other journals consulted include: Journal of Financial Services Research, Journal of Money, Credit and Banking, Journal of Credit Risk, South African Journal of Business and South African Journal of Economics. Subject librarians were also consulted to access computerized databases and information stored on CD-ROM.

Hyman Minsky Theory: Post- Keynesian Perspective

The connection between credit and money is the linchpin and center of Post-Keynesian economic thought. Economists sharing this stance strongly believe that money comes into existence at the same time as debt (Seremak, 2001). Post-Keynesian economists also believe that credit and money adapt to economic conditions. According to Banerjee (2011), of all the popularized post-Keynesian analysis of financial crises, Minsky’s theory of financial instability of capitalist economy ranks among the best in terms of contribution to economic theory. Higher leverage can lead to more pronounced confidence shocks and exceptional swings as conjectured by Minsky (1992). According to Cassidy (2008), there are basically five stages in Minsky’s model of credit cycles: displacement, boom, euphoria, profit taking and panic.

Bernanke, Gertler and Gilchrist (BGG) Model

The framework is part of the new Keynesian model, and it exhibits a ‘financial accelerator’ in that endogenous developments in credit markets work to propagate and amplify shocks to the macro-economy (Bernanke & Gertler, 1999). The key mechanism involves the link between ‘external finance premium’ (the difference between the cost of funds raised externally and the opportunity cost of funds internal to the firm) and net worth of potential borrowers (defined as the borrower’s liquid assets less outstanding obligations). To the extent that borrower’s net worth is pro-cyclical (because of the procyclicality of profits and asset prices for example), the external finance premium will be countercyclical (Bernanke et al., 1998). Internally generated funds are therefore cheaper than unsecured external borrowings. Moreover, the risk premium is determined by the creditworthiness of the borrower.

The Link between Business Cycles and Changes in Bank Credit

The existence of a connection between business cycles and bank-granted credit seems indisputable judging by the numerous researchers who have positively proved and validated the relationship. What is arguable is the direction of causality between economic growth and credit extension (Oluitan, 2009). As discussed in literature, the relationship between these variables may be unidirectional, the reverse or bi-directional (Ramirez, 2013; Manikandan, Manivel & Vettriselvan, 2012; Patrick, 1966). Patrick (1966) describes the causality direction as demand-following and supply-leading hypotheses. When the relationship is from financial development to economic growth then this relationship is termed as supply-leading since it is believed that the financial institution’s activities increases the supply of credit which as a result creates economic growth. Similarly, when growth within the economy results in increase in the demand for credit then this subsequently motivates financial development, which is then styled as demand-following hypothesis (Manikandan, et al., 2012; Oluitan, 2009; Patrick, 1966).

The Link between Business Cycles and Changes in Bank Credit

The existence of a connection between business cycles and bank-granted credit seems indisputable judging by the numerous researchers who have positively proved and validated the relationship. What is arguable is the direction of causality between economic growth and credit extension (Oluitan, 2009). As discussed in literature, the relationship between these variables may be unidirectional, the reverse or bi-directional (Ramirez, 2013; Manikandan, Manivel & Vettriselvan, 2012; Patrick, 1966). Patrick (1966) describes the causality direction as demand-following and supply-leading hypotheses. When the relationship is from financial development to economic growth then this relationship is termed as supply-leading since it is believed that the financial institution’s activities increases the supply of credit which as a result creates economic growth. Similarly, when growth within the economy results in increase in the demand for credit then this subsequently motivates financial development, which is then styled as demand-following hypothesis (Manikandan, et al., 2012; Oluitan, 2009; Patrick, 1966). Other scholars believe that this causality runs in both directions. This third postulate is related to bi-directional causality (Ramirez, 2013; Manikandan, et al., 2012). It means causality is mutual and reciprocal, that is, bank-granted credit to economic growth and economic growth to bank-granted credit.

Demand-Following Hypothesis

Contrary to the claims of the supply-leading proponents, the supporters of the demandfollowing view postulate that economic growth is a causal factor for credit market development (Lucas, 1998; Ireland, 1994; Junga, 1986; Demetriades & Hussein, 1969; Gurley & Shaw, 1967; Patrick, 1966; Robinson, 1952). In their views, the increasing demand for credit, created by the growth of the real sector of the economy, stimulates credit extension (Gurley & Shaw, 1967, cited in Oluitan, 2009). Robinson (1952), for instance, opined that economic growth spurs financial institutions to finance enterprises, 42 implying that bank-granted credit responds to economic growth. Thus, where ‘enterprises lead, finance follows’ (Oluitan, 2009).

TABLE OF CONTENTS :

• ABSTRACT
• DECLARATION
• ACKNOWLEDGEMENTS
• ACRONYMS
• LIST OF TABLES
• LIST OF FIGURES
• CHAPTER ONE INTRODUCTION
  • 1.1 Orientation
  • 1.2 Overview: Business Cycle and Credit Cycle Episodes in South Africa
    • 1.2.1 Business Cycle Episodes in South Africa
    • 1.2.2 Banking Cycle Episodes in South Africa
  • 1.3 Background and Problem Statement
  • 1.4 Objectives and Hypotheses of the Research
  • 1.5 Rationale of the Study
  • 1.6 Significance of the Study
  • 1.7 Delimitation and Scope
  • 1.8 Outline of the Research Report
  • 1.9 Chapter Summary
• CHAPTER TWO THEORETICAL FOUNDATION AND LITERATURE REVIEW
  • 2.1 Introduction
  • 2.2 Literature Sources
    • 2.2.1 Primary Literature Sources
    • 2.2.2 Secondary Literature Sources
    • 2.2.3 Tertiary Literature Sources
  • 2.3 Theoretical Foundation
    • 2.3.1 Business Cycle Framework
    • 2.3.2 Identifying Credit Cycle
    • 2.3.3 Underpinning Theories and Conceptual Framework
    • 2.3.4 The Link between Business Cycles and Changes in Bank Credit
  • 2.4 Review of Literature: Empirical Evidence
    • 2.4.1 Evidence of Supply-Leading View
    • 2.4.2 Evidence of Demand-Following View
    • 2.4.3 Evidence of Bi-directional View
    • 2.4.4 Evidence of Other Causality Patterns
  • 2.5 Chapter Summary
• CHAPTER THREE RESEARCH METHODOLOGY
  • 3.1 Introduction
  • 3.2 Research Paradigms
  • 3.3 Research Approaches: Primary Data
    • 3.3.1 Quantitative versus Qualitative Approaches
    • 3.3.2 Mixed Methods Approach
  • 3.4 Study Population and Unit of Analysis
    • 3.4.1 Study population
    • 3.4.2 Unit of Analysis
  • 3.5 Study Sample: Sampling Issues
  • 3.6 Sample Size
  • 3.7 Data Collection and variable measurement
    • 3.7.1 Semi-Structured Interviews
    • 3.7.2 Structured Survey Questionnaire
  • 3.8 Pilot Testing the Questionnaire
  • 3.9 Data Analysis Methods & Techniques: Survey Data
    • 3.9.1 Qualitative Data Analysis
    • 3.9.2 Quantitative Analysis
  • 3.10 Validity and Reliability
  • 3.11 Ethical Considerations
  • 3.12 Econometric Methodology
    • 3.12.1 Formulation of Empirical Model
    • 3.12.2 Time Series Data Description
    • 3.12.3 Econometric Analysis Techniques
    • 3.12.4 Properties of Data
    • 3.12.5 Unit Roots Test
    • 3.12.6 Cointegration Test
    • 3.12.7 Vector Error Correction Model
    • 3.12.8 Granger Causality Test
    • 3.12.9 Statements of Hypotheses
  • 3.13 Chapter Summary
• CHAPTER FOUR DATA ANALYSIS AND RESULTS
• CHAPTER FIVE CONCLUSIONS AND POLICY IMPLICATIONS

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Analysis of the Relationship between Business Cycles and Bank Credit Extension: Evidence from South Africa