The Impact of Commercial Bank Credit on Inflation: Empirical Evidence from Lao PDR

Abstract

This research aims to study and analyze the impact of Commercial Bank Credit supply on the Inflation rate in the Lao PDR, covering the period from 2018 to 2024. This topic is of utmost importance and necessity given the current situation where the country is facing the highest inflation in over 20 years, especially the sharp rise in 2023 to 31.1%, which has directly affected economic stability, the value of the Lao Kip, and the livelihood of the people. To achieve these objectives, the study utilizes the Vector Autoregressive Model (VAR) as the primary analytical tool, along with the Impulse Response Function (IRF) and Variance Decomposition analysis, to examine the equilibrium relationship and the direction of mutual impact between the variables.

The research results clearly indicate that Commercial Bank Credit supply and the Inflation rate have a statistically significant mutual relationship. Specifically, a one-unit shock to credit supply leads to a positive and statistically significant increase in the inflation rate. Concurrently, inflation is also a statistically significant cause of Commercial Bank Credit supply. This study is therefore highly critical in providing empirical evidence to the Bank of the Lao PDR and related agencies to consider these findings when setting the direction of monetary policy and issuing various regulations that align with the economic situation in each period, with the aim of maintaining monetary stability and effectively controlling high inflation within the country