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Agricultural Credit Distribution by Banks and its Relationship with Agricultural GDP in Pakistan: A Granger Causality Approach

Chandio A.A, Jiang Y, Magsi H, Rehman A, Koondhar M. A

Abstract


The agricultural sector of Pakistan has been playing an important role in boosting the agricultural production as well as income of the farmers. In agriculture sector, demand for credit has increased over the past few decades due to increased prices of major agricultural inputs. The purpose of this study was to examine the direction of causality between agricultural formal credit distribution and agricultural GDP in Pakistan over the period 1992-2016. Augmented Dickey Fuller (ADF) and P-P unit root tests have been applied to check the stationarity of the data and Co-integration test has been used to determine the long run relationship between dependent and independent variables. An estimation method Ordinary Least Square (OLS) was applied to investigate the relationship between agricultural formal credit distribution and agricultural GDP in Pakistan. Furthermore, the causality relationship between variables is examined by Granger causality approach. The results of ADF and P-P unit root tests revealed that all variables become stationery at first difference which confirm to co-integration test. Similarly, the results of Johansen Co-integration test showed that there is existence of a long run relationship between dependent and independent variables. The results of regression analysis showed that the coefficient of agricultural formal credit distribution is highly significant at both 1% and 5% of significance level, which indicates that there is a strong positive and significant relationship between agricultural formal credit and agricultural GDP. This means that one percent age of increase in agricultural formal credit will enhance agricultural GDP by 0.93%. Granger causality consequences suggest that there is bi directional causality relationship exists among agricultural formal credit distribution and agricultural GDP.


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