The switching impact of financial stability and economic growth in Qatar: Evidence from an oil-rich country

Abstract

This paper investigates the relationship between financial stability and economic growth in the Qatar economy over the period 1980:Q1–2013:Q4. The paper estimates the short- and long-run impact of real GDP growth on real loan provisions using a Vector Error Correction Model (VECM) with structural breaks. Moreover, the empirical analysis includes an impulse response analysis to evaluate Qatar banking sectors’ resilience to adverse macroeconomic shocks so as to check whether financial instability may impede economic growth or vice versa. To this end, the empirical results indicate that there is a long-run relationship with a shift in the cointegration vector between real loan provisions and real GDP growth and other explanatory variables. The empirical findings show that real GDP growth has a long-run negative impact and a moderate short-run positive impact on real loan provisions. This negative relationship indicates that an increase in real GDP growth may lead to less defaults on loans. Furthermore, the impulse response test indicates that unexpected shocks in real GDP growth have a negative impact on real loan provisions with the largest contribution in real loan provision changes coming mainly from changes in real GDP growth.