The issue about the causal relationship between economic growth and credit market development is very important, particularly in a big emerging economy such as Indonesia, which has implemented various financial reforms following East Asian Financial Crisis in 1997. Efficient credit allocation in the banking sector will distribute the credit to the productive sector and, thus, promote economic growth. Meanwhile, development in the business sector will also increase demand for credit, encouraging credit market development. Given this rationale, this study aims at finding the significance of the linkage between economic growth and credit market development in Indonesia by investigating their long-run causality relationship over the period of 1985-2011. The empirical result presented in this paper suggests that there is a bidirectional relationship between economic growth and credit market development in Indonesia. In addition, it also indicates that lending rate positively affects the development of the credit market in Indonesia.
ISSN 0116-7111 (Print)
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