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I relatively new to financial mathematics but I am wondering if at all there exists a relationship between credit utilization (the rate at which the public accesses credit from financial institutions) and stock market growth (credit utilization influence on the stock market) of an economy.

Please I need advice on these questions: If there is a relationship, how can I best model this situation. If no, what would be the reasons for this?

Thank you very much

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Yes of course, credit rates depend on interest rates (i.e. https://en.wikipedia.org/wiki/Libor), which are set by some group of banks in almost every country

Going further bankers analyze the market situation and also national interest rates, which are set by central bankers in every country which has a central bank (https://en.wikipedia.org/wiki/Central_bank). They must do it because they usually borrow money from the general national system.

Lastly, central bankers need to analyze the economy, money fluctuations, inflation and adjust the money supply (through national interest rates) in a way which maximize output (GDP growth in most cases) in the long term. They also tend to realize some short term goals (like Quantitative Easing in the primary form). In many models which are developed by central bankers a stock market is also taken as an indicator, often considered as an economy anticipating indicator.

Example. Last statistics show that there is a low inflation(below the goal written in the country's constitution). The stock market is falling because the economy needs money for the current operations (paying the invoices, salaries etc.). The central bank decides to lower the interest rates which give the commercial bank's an opportunity to earn more or also to lower their interest rates and compete for the clients. That leads to cheaper credits (lower installments) and the credit availability increases for institutional and individual clients.

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  • $\begingroup$ Szostakowski, Thanks!!!!!! This brings it out clearly! I appreciate. $\endgroup$ – KaRJ XEN Sep 6 '15 at 15:31
  • $\begingroup$ you are welcome :) $\endgroup$ – Robert Szóstakowski Oct 21 '15 at 17:45

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