Credit Allocation to Private Sector and Growth: An ARDL Analysis for a Transitional Economy

This study examines the role of credit allocation to the private sector in driving economic growth in Vietnam’s transitional economy. The primary objective is to evaluate whether bank credit allocation fosters sustainable output expansion or, conversely, produces diminishing returns when it surpasses optimal levels. Employing the Autoregressive Distributed Lag (ARDL) bounds testing framework, the analysis uses annual data for 1990–2024 and compares three specifications: credit to the private sector, aggregate credit to the economy, and credit to the state sector. Findings indicate a robust long-run cointegration between credit and output, but with a clear nonlinear pattern: private credit enhances growth up to a threshold of roughly 91% of GDP, beyond which its marginal effect declines. While capital formation and moderate inflation consistently support long-term growth, foreign direct investment exerts mainly short-term benefits, and state-directed credit shows no significant contribution. The novelty of this paper lies in extending previous studies through a longer time horizon, updated post-GDP-revision data, and explicit disaggregation between private and state credit. By highlighting threshold effects and sectoral inefficiencies, this research improves understanding of the credit–growth nexus in transitional economies and underscores the need to prioritize credit quality, efficiency, and SME access in credit policy. JEL Classification: E51, G21, O47, P27.