Credit expansion – A study of the relation between bank lending and economic growth in Sweden

Abstract: A non-Granger causality test between bank lending and different economic performance measures represented by the real economy, real assets and the financial economy is conducted on Sweden. To capture for the effects of structural changes in the economy, a long period is analyzed (142 years) and two types of tests are made, one for the short- run and one for the long-run. The main findings are that the effect of bank lending on the measures has changed over time and that real asset prices and stock prices have surged since the financial crisis during the early 1990’s. This combined with expansionary monetary policy conducted by the central bank raises questions regarding the financial stability in Sweden. Similar studies performed on other countries show that credit booms are important in shaping business cycles and also the danger of too high leveraging among households is stressed.