Credit Growth in Central and Eastern Europe: New (Over)Shooting Stars?

This paper analyzes the equilibrium level of private credit to GDP in 11 Central and Eastern European countries on the basis of a number of dynamic panels containing quarterly data on Central and Eastern European economies, emerging markets and developed OECD countries. In doing so, we propose a unifying framework which includes factors driving both the demand for and the supply of private credit. We emphasize that relying on in-sample panel (i.e. including only transition countries) estimates for transition economies is problematic not only because of the upward bias of the estimated constant and slope coefficients due to the initial undershooting and the ensuing steady adjustment toward equilibrium, but also because of the instability of the equations estimated for transition economies. The use of out-of-sample (i.e. excluding transition economies) panels suggests that some of the transition economies might have already come close to equilibrium by 2004, whereas others have private credit-to-GDP ratios which are well below the level the fundamentals would justify.