THE IMPACT OF BANKING SECTOR LIQUIDITY AND STABILITY ON ECONOMIC GROWTH IN THE WESTERN BALKANS: EVIDENCE FROM 2013–2023

Abstract

This paper examines the impact of banking sector liquidity and stability on driving economic growth in the Western Balkans (comprising Kosovo, Albania, Montenegro, North Macedonia, Bosnia and Herzegovina, Croatia, and Serbia) from 2013 to 2023. Using panel data analysis, the study includes linear regression, Fixed Effects (FE), Random Effects (RE), Hausman-Taylor (HTH), and Generalised Method of Moments (GMM) to examine the relationship between key banking indicators and economic growth. The dependent variable is economic growth, while independent variables include private sector credit, bank deposits, non-performing loans, government expenditure and inflation. The empirical results suggest that the banking sector plays a crucial role in driving economic growth Western Balkans countries. Specifically, bank deposits have a positive and statistically significant effect, while private sector credit also shows a positive effect but is not statistically significant. In contrast, non-performing loans and inflation have a negative impact on economic growth. These findings underscore the importance of strengthening banking sector liquidity, stability and enhancing credit access to promote sustainable economic growth, providing valuable insights for policymakers and financial regulators.