Credit Fuelled Asset Prices and Financial Stability - Is there a causal relationship between credit growth and stock market prices?

Abstract

This thesis investigates the causal relationship between credit growth and stock market prices over the time period 1981-2017 in the US, the UK and Sweden. By performing a Granger causality test to examine if credit affects stock market prices, we find evidence that there is no statistically significant Granger causality. However, we do find that private credit growth is positively correlated with stock market prices. The role of credit in the macro economy and how it contributes to credit fuelled asset prices, which poses a threat for financial stability is a topic that is currently of great concern for researchers and policy makers. Furthermore, this thesis aims to investigate what financial variables can be used to identify threatening credit growth bubbles and how central banks should respond to fluctuations in asset prices.