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Private Sector Credit in CESEE: Long-Run Relationships and Short-Run Dynamics

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  • Markus Eller

    ()
    (Oesterreichische Nationalbank, Foreign Research Division)

  • Michael Frömmel

    ()
    (Ghent University, Department of Financial Economics)

  • Nora Srzentic

Abstract

This paper provides an analysis of the long- and short-run determinants of domestic bank lending to the private sector in eleven Central, Eastern and Southeastern European (CESEE) countries. We identify regime shifts for the observation period of 1997 to 2009, and the resulting subperiods are characterized by a different impact of the credit growth determinants. Estimating a credit demand equation as the long-term relation, we find – for most countries – a cointegration relationship with economic activity. We then examine the shortrun dynamics by applying both a linear and a nonlinear (Markov-switching) error correction model. While there is a significant correlation between credit growth and supply factors, namely bank deposits and banks’ equity, its impact differs across the subperiods. Identified regime switches in the short-run relation are driven primarily by differences in the credit supply factors rather than by the adjustment toward the credit equilibrium as the error correction coefficients show only slight cross-regime differences. In terms of regime switching, we distinguish between two groups of countries: those with one dominant regime, which is only briefly interrupted by a second one, and those with two equally pronounced regimes. In the latter group, a marked switch occurred just before or when the global crisis hit the CESEE region in the latter part of 2008. This regime shift is associated with a decreased correlation between deposit and credit growth.

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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Focus on European Economic Integration.

Volume (Year): (2010)
Issue (Month): 2 ()
Pages: 50-78

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Handle: RePEc:onb:oenbfi:y:2010:i:2:b:1

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Related research

Keywords: Bank lending to the private sector; transition economies; credit dynamics; Markovswitching error correction model;

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Cited by:
  1. Bouvatier, Vincent & López-Villavicencio, Antonia & Mignon, Valérie, 2014. "Short-run dynamics in bank credit: Assessing nonlinearities in cyclicality," Economic Modelling, Elsevier, vol. 37(C), pages 127-136.
  2. Seidler, Jakub & Gersl, Adam, 2012. "Excessive credit growth and countercyclical capital buffers in basel III: an empirical evidence from central and east european countries," MPRA Paper 42541, University Library of Munich, Germany.
  3. Kelly, Robert & McQuinn, Kieran & Stuart, Rebecca, 2013. "Exploring the steady-state relationship between credit and GDP for a small open economy: the case of Ireland," Working Paper Series 1531, European Central Bank.
  4. Szabolcs Szikszai & Tamás Badics & Csilla Raffai & Zsolt Stenger & András Tóthmihály, 2013. "Studies in Financial Systems No 8 Hungary," FESSUD studies fstudy08, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  5. Buncic, Daniel & Melecky, Martin, 2013. "Equilibrium credit : the reference point for macroprudential supervisors," Policy Research Working Paper Series 6358, The World Bank.
  6. Adam Geršl & Jakub Seidler, 2012. "Credit Growth and Countercyclical Capital Buffers: Empirical Evidence from Central and Eastern European Countries," Working Papers IES 2012/3, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2012.
  7. Adam Gersl & Jakub Seidler, 2011. "Excessive Credit Growth as an Indicator of Financial (In)Stability and its Use in Macroprudential Policy," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2010/2011, chapter 0, pages 112-122 Czech National Bank, Research Department.
  8. Adam Gersl & Jakub Seidler, 2011. "Credit Growth and Capital Buffers: Empirical Evidence from Central and Eastern European Countries," Research and Policy Notes 2011/02, Czech National Bank, Research Department.

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