Short-Run Inertia and Long-Run Adjustment in Bank Credit: An ARDL–ECM Analysis of Monetary Transmission in an Emerging Economy

Key findings from this study

• The study found that the policy rate exerts no statistically significant short-run effect on bank credit, indicating high credit inertia in Morocco's financial system.
• The authors report that while a stable long-run equilibrium relationship exists for credit, neither monetary policy nor credit risk variables achieve significant long-run elasticities.
• The researchers demonstrate that credit dynamics operate primarily through short-run adjustment mechanisms driven by credit risk and balance-sheet allocation rather than conventional interest-rate channels.

Overview

This study investigates how Morocco's central bank policy rate transmits to bank credit extended to the non-financial private sector from 2006 to 2023. The research employs an ARDL–ECM framework to distinguish short-run credit dynamics from long-run equilibrium relationships while accounting for structural breaks. Morocco provides a relevant case for examining monetary transmission in bank-dominated emerging economies where non-financial corporations drive investment and employment.

Methods and approach

The analysis utilizes monthly data spanning 2006–2023 within an ARDL–ECM econometric framework. This approach permits separation of short-run adjustment mechanisms from long-run equilibrium relationships. The methodology incorporates tests for structural breaks and bounds testing to establish the existence of stable long-run cointegration relationships among variables. Credit risk and balance-sheet variables feature alongside monetary policy variables in the specification.

Results

The policy rate produces no statistically significant effect on bank credit during the short run, indicating pronounced credit inertia. The bounds test confirms the existence of a stable long-run equilibrium relationship, though neither monetary policy nor credit risk variables exhibit significant long-run elasticities. Short-run credit dynamics emerge as the primary driver of credit movements, with credit risk and balance-sheet allocation mechanisms shaping adjustment patterns throughout the observation period.

Implications

These findings demonstrate that conventional interest-rate transmission operates with limited effectiveness in Morocco's banking system. Monetary policy influences credit primarily through prudential and balance-sheet channels rather than direct pricing mechanisms. The results suggest that monetary authorities' capacity to stimulate credit depends substantially on prevailing risk conditions and their interaction with prudential regulatory frameworks governing bank behavior.

Policymakers face constraints in using the policy rate as a direct instrument for credit expansion in bank-dominated systems. Effectiveness requires complementary attention to risk conditions and regulatory structures that shape bank balance-sheet decisions. Financial stability considerations and prudential regulations become critical parameters in assessing monetary transmission rather than peripheral considerations in policy design.

The study underscores heterogeneity in monetary transmission mechanisms across emerging economies. Bank-dominated financial systems with pronounced credit inertia may require monetary-fiscal policy coordination or targeted macroprudential interventions to achieve desired credit outcomes. Standard transmission frameworks calibrated for developed economies prove insufficient for characterizing policy effects in emerging market contexts.

Scope and limitations

This summary is based on the study abstract and available metadata. It does not include a full analysis of the complete paper, supplementary materials, or underlying datasets unless explicitly stated. Findings should be interpreted in the context of the original publication.