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Household Credit in the New Europe: Lending Boom or Sustainable Growth?

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  • Coricelli, Fabrizio
  • Mucci, Fabio
  • Revoltella, Debora

Abstract

Retail lending grew very fast in the New Europe region in the last years, prompting a debate on whether such a rapid growth can be considered sustainable. This paper investigates the main determinants of retail lending growth throughout the region. It tries to identify episodes of credit boom and analyzes the possible correlation between such booms, consumption booms and a country external account position. Estimating an aggregate consumption function, under the assumption of liquidity-constrained households, the paper finds that current trends in household credit markets largely reflect an equilibrium phenomenon, in which household credit increases rapidly from extremely low initial levels, in the context of a relaxation of liquidity constraints. The rate of growth of credit responds to changing market conditions on the supply side and to good prospects for income growth. In such an environment, loosening credit market conditions can have sizable effects on consumption, which, in some cases may create macroeconomic imbalances, both in terms of current account deficits and inflationary pressures.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5520.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5520

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Keywords: credit booms; household credit; new members of the European Union;

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References

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  1. 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. 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.
  2. Dobromil Serwa, 2011. "Identifying multiple regimes in the model of credit to households," National Bank of Poland Working Papers 99, National Bank of Poland, Economic Institute.
  3. Peter Backé & Cezary Wójcik, 2006. "Catching-up and Credit Booms in Central and Eastern European EU Member States and Acceding Countries: An Interpretation within the New Neoclassical Synthesis Framework," CESifo Working Paper Series 1836, CESifo Group Munich.
  4. Brown, Martin, 2013. "The transmission of banking crises to households : lessons from the 2008-2011 crises in the ECA region," Policy Research Working Paper Series 6528, The World Bank.
  5. Meral Karasulu, 2008. "Stresstesting Household Debt in Korea," IMF Working Papers 08/255, International Monetary Fund.
  6. Jarko Fidrmuc & Christa Hainz & Anton Malesich, 2006. "Default Rates in the Loan Market for SMEs: Evidence from Slovakia," William Davidson Institute Working Papers Series wp854, William Davidson Institute at the University of Michigan.
  7. Backé, Peter & Wójcik, Cezary, 2008. "Credit booms, monetary integration and the new neoclassical synthesis," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 458-470, March.
  8. Sirtaine, Sophie & Skamnelos, Ilias, 2007. "Credit growth in emerging Europe : a cause for stability concerns?," Policy Research Working Paper Series 4281, The World Bank.

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