DETERMINANTS OF LENDING TO BOSNIA AND HERZEGOVINA UNDER THE GRAVITY MODEL APPROACH

The analysis of a data set of observation for 11 countries in period from 2005 to 2012 shows how capital flow (lending to Bosnia and Herzegovina) is influenced by many factors such as: gross domestic product of lending country, gross domestic product of Bosnia and Herzegovina, distance between two countries, amount of bilateral trade flows, exchange rate, bank ownership, being part of European Union and Euro Zone, signing Free Trade Agreement and area of partner country. Selected variables are chosen on the previous research, availability of data and analysis is done through several methods and some diagnostics tests are performed in order to determine the most appropriate model that explains determinants of lending to Bosnia and Herzegovina. Results indicate based on data that gross domestic products GDP of selected country, distance, exchange rate, area of country and bilateral trade flows have significant effect on borrowings. On the other hand variables EURO, EU, FTA, GDP of B&H and bank ownership do not appear to have significant effect on lending to Bosnia and Herzegovina. Variables GDPcntr, Distance, EU and bank ownership have negative effect on lending, while variables EURO, exchange rate, FTA, GDPB&H, Areacntr and amount of bilateral trade flows are positively related with borrowing of Bosnia and Herzegovina. Selected Variables, except of GDPcntr, Bank ownership and EU, have expected signs. This paper contributes to both theoretical and the empirical literature about gravity models of Bosnia and Herzegovina. The aim of study is to show that there is positive relationship between lending and bilateral trade flows and how gravity model of trade can be applied to lending model. This study should provide incentives for further research and to apply gravity model to explain determinants of lending to Bosnia and Herzegovina.