Do Free Banks Overexpand in Unison?
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Do Free Banks Overexpand in Unison?
Time Series Evidence from Hong Kong, 1954-66
Credit and Capital Markets – Kredit und Kapital, Vol. 35 (2002), Iss. 1 : pp. 1–18
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Kam Hon Chu, St. John's/Canada
References
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Abstract
This paper applies the Engle-Granger cointegration framework to test the inconcert overexpansion hypothesis under free banking. The highly unregulated Hong Kong banking system during 1954-66 is examined. The results suggest a long-run relationship between aggregate bank loans and GDP, both in real terms. Furthermore, the error correction model indicates that deviations of bank loans from the long-run relationship were “self-correcting” in the sense that real loans in excess of its long-run equilibrium level in a year were followed by a contraction in the next year and vice versa. The time-series results are reinforced by further examination of individual banks’ loan growth rates. Overall, the findings reject the in-concert overexpansion hypothesis. (JEL E32, E42, E51)