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Catching-up and Credit Booms in Central and Eastern European EU Member States and Acceding Countries: An Interpretation within the New Neoclassical Synthesis Framework

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  • Peter Backé
  • Cezary Wójcik

Abstract

Credit to the private sector has risen rapidly in many Central and Eastern European EU Member States (MS) and acceding countries (AC) in recent years. The lending boom has recently been particularly strong in the segment of loans to households, primarily mortgage-based housing loans, and in those countries that operate currency boards or other forms of hard pegs. The main aim of this paper is to propose a conceptual framework to analyze the observed developments with a view to exploring some policy implications at a stage in which these countries are preparing for their prospective integration with the euro area. To achieve this, we first use a stylized New Neoclassical Synthesis (NNS) framework, which has recently been advanced by Goodfriend (2002) and Goodfriend and King (2000). We then discuss the implications of the NNS model for credit dynamics and ensuing monetary policy challenges. Specifically, we emphasize consumption smoothing as an important channel of the observed credit expansion and we show how it is related to and how it affects the monetary policy making in MS and AC. In doing so, we place our discussion in the context of the monetary integration process in general and the nominal convergence process in particular.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1836.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1836

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Keywords: credit booms; new neoclassical synthesis; currency boards; euro area; convergence process;

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References

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  1. Goodfriend, Marvin, 2002. "Monetary Policy in the New Neoclassical Synthesis: A Primer," International Finance, Wiley Blackwell, vol. 5(2), pages 165-91, Summer.
  2. Raghuram G. Rajan & Luigi Zingales, 2001. "Financial Systems, Industrial Structure, and Growth," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 467-482.
  3. Coricelli, Fabrizio & Mucci, Fabio & Revoltella, Debora, 2006. "Household Credit in the New Europe: Lending Boom or Sustainable Growth?," CEPR Discussion Papers 5520, C.E.P.R. Discussion Papers.
  4. Gottfries, Nils, 2003. "Booms and Busts in EMU," Working Paper Series 2003:29, Uppsala University, Department of Economics.
  5. Egert, Balázs & Backé, Peter & Zumer, Tina, 2006. "Credit growth in Central and Eastern Europe: new (over)shooting stars?," Working Paper Series 0687, European Central Bank.
  6. Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Finance and the sources of growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125520, Tilburg University.
  7. Christoph Duenwald & Nikolay Gueorguiev & Andrea Schaechter, 2005. "Too Much of a Good Thing? Credit Booms in Transition Economies," IMF Working Papers 05/128, International Monetary Fund.
  8. Ronald MacDonald & Cezary Wójcik, 2006. "Catching-up, Inflation Differentials and Credit Booms in a Heterogeneous Monetary Union: Some Implications for EMU and new EU Member States," CESifo Working Paper Series 1761, CESifo Group Munich.
  9. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  10. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  11. Ceyla Pazarbasioglu & Gudrun Johnsen & Paul Louis Ceriel Hilbers & Inci Ötker, 2005. "Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies," IMF Working Papers 05/151, International Monetary Fund.
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Cited by:
  1. Brzoza-Brzezina, Michał & Chmielewski, Tomasz & Niedźwiedzińska, Joanna, 2007. "Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?," MPRA Paper 6759, University Library of Munich, Germany.

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