The linkage between insurance activity and banking credit: Some evidence from dynamic analysis

• This paper examines the linkages between insurance activity and banking credit.
• We adopt an advanced VAR to eliminate the structural changes and pretest bias.
• There is a stably positive relationship between the series in the long-run.
• Parameter stability tests show the short-run results in full sample are unreliable.
• The causal nexus between insurance activity and banking credit is time-varying.

This paper investigates the long-run and short-run linkages between insurance activity and banking credit for G-7 countries. To minimize the pretest bias and overcome the structural changes, we adopt the bootstrap Granger causality test applied to full sample and subsamples with a fixed window size. The Johansen cointegration test with GMM-IV estimator finds a long-run positive relation between the series. The full sample results of bootstrap Granger causality test show that there is predictive power from life insurance activity to banking credit only for France and Japan, while the short-run causal relationships between nonlife insurance activity and banking credit are country-specific. However, parameter stability test results suggest that the short-run results in full sample are unreliable. The results of rolling VAR models report that the causal linkages between them are time-varying across various subsamples. These findings offer some useful insights for achieving the co-evolution between insurance and banking credit markets.