Rural credit and agricultural production: Empirical evidence from Brazil

Abstract

This article examines the long‐ and short‐run effects of rural credit on the gross value added of agricultural output in Brazil. We apply the dynamic vector error correction model (VECM) to the estimation and testing. The main finding is that there is a positive long‐run relationship between agricultural sector production and loans from financial institutions to the agricultural sector. The long‐run elasticity estimated was 0.44, implying that an increase of 1% in rural credit leads to a 0.44% increase in the agricultural sector's GDP. This result supports the policy of rural credit as a crucial institutional instrument to strengthen the agricultural sector and as an important factor to boost the country's economic growth.