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

Author

Listed:
  • Mihail Petkovski

    (Faculty of Economics, University Ss. Cyril and Methodius in Skopje, Republic of Macedonia)

  • Jordan Kjosevski

    (S/N Broker, Republic of Macedonia)

  • Aleksandar Stojkov

    (Iustinianus Primus Law Faculty, Ss. Cyril and Methodius in Skopje)

  • Katerina Bartasek Petkovska

    (Cleo Finance)

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.

Suggested Citation

  • Mihail Petkovski & Jordan Kjosevski & Aleksandar Stojkov & Katerina Bartasek Petkovska, 2023. "Investigating the Causality between Bank Profitability and Economic Growth: Evidence from Central and Eastern Europe," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 73(3), pages 303-327, October.
    • Handle: RePEc:fau:fauart:v:73:y:2023:i:3:p:303-327
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    File URL: https://journal.fsv.cuni.cz/mag/article/show/id/1522
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    More about this item

    Keywords

    bank profitability; economic growth; Central and Eastern Europe; panel analysis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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