The relationship of domestic credit to private sector with inflation in the framework of monetary transmission mechanism: The case of OECD countries

One of the main goals of central banks is to maintain price stability by keeping inflation under control. Central banks implement monetary policies to ensure price stability. They affect the volume of credit through monetary policies. This process, known as the bank credit channel of the monetary transmission mechanism, affects the real economy and inflation through monetary policy. Since bank credit affects the amount of money in the economy, it plays an important role in the functioning of aggregate economic activity. The volume of bank credit can even lead to crises in the economy. In this study, the relationship between domestic credit to private sector and inflation in 16 OECD countries was analyzed using annual data for the period 2010-2023 using the panel data analysis method within the framework of the monetary transmission mechanism. In this context, the Pedroni panel cointegration test and the Dumitrescu-Hurlin panel causality test were applied. According to the cointegration test results, it was concluded that there was a long-term cointegration relationship between money supply, bank credits and inflation. According to the causality test results, it was determined that there was a unidirectional causality relationship from bank credits to inflation. The findings showed that bank credits affected inflation both in the long term and in the short term and that the bank credit channel, which is one of the monetary transmission mechanisms, operated effectively in the long term.