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Is Poland at Risk of a Boom-and-Bust Cycle in the Run-Up to Euro Adoption?

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  • Eichengreen, Barry
  • Steiner, Katharina

Abstract

We ask whether Poland is at risk of the boom-bust problem that has afflicted economies around the time of euro adoption. Our answer, inevitably, is mixed. On the one hand the fact that Poland is an outlier, credit-growth wise, accentuates the danger of a boom if one believes in mean reversion. Our econometrics indicate that the fall in interest rates that will flow from expectations of euro adoption will further feed that boom. On the other hand the fact that interest rates have already converged part way to euro-area levels (and more extensively than in earlier adopters that experienced a sharp fall in rates and a pronounced credit boom), especially in the case of lending to firms, suggests that this shock may be less intense in Poland. And it is certainly conceivable that the same policies and country characteristics (not always visible to the econometrician) that have restrained credit growth in the past may continue to do so in the future. The broader literature also points to two set of factors, the first of which makes the danger of an unsustainable credit boom more immediate, the second of which makes it more remote. In the first category are the continuing limitations of the supervisory framework and the weakness of the finance minister in the budget-making process. In the second are a record of rigorous prudential supervision and the existence of relatively competitive labor markets.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7027.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7027

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Keywords: euro; Poland;

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References

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  1. Gergely Kiss & Márton Nagy & Balázs Vonnák, 2006. "Credit Growth in Central and Eastern Europe: Convergence or Boom?," MNB Working Papers 2006/10, Magyar Nemzeti Bank (the central bank of Hungary).
  2. Bal�zs �gert & Peter Back� & Tina Zumer, 2007. "Private-Sector Credit in Central and Eastern Europe: New (Over)Shooting Stars?," Comparative Economic Studies, Palgrave Macmillan, vol. 49(2), pages 201-231, June.
  3. Cottarelli, Carlo & Dell'Ariccia, Giovanni & Vladkova-Hollar, Ivanna, 2005. "Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 83-104, January.
  4. Thomas S. Mondschean & Timothy P. Opiela, 1997. "Banking reform in a transition economy: the case of Poland," Economic Perspectives, Federal Reserve Bank of Chicago, issue Mar, pages 16-32.
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  6. Manoj Atolia & Edward F. Buffie, 2006. "Exchange-Rate-Based Stabilization, Durables Consumption, and Stylized Facts," Computing in Economics and Finance 2006 416, Society for Computational Economics.
  7. Zsolt Darvas & György Szapáry, 2008. "Euro Area Enlargement and Euro Adoption Strategies," Working Papers 0801, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
  8. Jorge Braga de Macedo, 2007. "Competitiveness and convergence in Portugal," GEE Papers 0004, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised Nov 2007.
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  11. Breuss, Fritz & Fink, Gerhard & Haiss, Peter, 2004. "How well prepared are the New Member States for the European Monetary Union?," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 769-791, October.
  12. Hallerberg, Mark & Wolff, Guntram B., 2006. "Fiscal institutions, fiscal policy and sovereign risk premia," Discussion Paper Series 1: Economic Studies 2006,35, Deutsche Bundesbank, Research Centre.
  13. Boeri, Tito & Garibaldi, Pietro, 2006. "Are labour markets in the new member states sufficiently flexible for EMU?," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1393-1407, May.
  14. Gabriel Fagan & Vítor Gaspar, 2007. "Adjusting to the Euro," Working Papers w200703, Banco de Portugal, Economics and Research Department.
  15. Jakub Borowski & Michal Brzoza-Brzezina, 2004. "Designing Poland's Macroeconomic Strategy on the Way to the Euro Area," EUI-RSCAS Working Papers 10, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  16. R. Golinelli & R. Orsi, 2001. "Hungary and Poland," Working Papers 424, Dipartimento Scienze Economiche, Universita' di Bologna.
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Cited by:
  1. Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 717-732, October.
  2. Agnieszka Stążka-Gawrysiak, 2011. "Poland on the road to the euro: How serious is the risk of boom-bust cycles after the euro adoption? An empirical analysis," National Bank of Poland Working Papers 103, National Bank of Poland, Economic Institute.
  3. Georgy Ganev, 2009. "Costs and Benefits of Euro Adoption in Bulgaria," Working Paper / FINESS 5.3, DIW Berlin, German Institute for Economic Research.

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