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Credit growth in Central and Eastern Europe - new (over)shooting stars?

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Author Info
Balázs Égert () (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria)
Peter Backé () (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria)
Tina Zumer () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)

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Abstract

This paper analyzes the equilibrium level of private credit to GDP in 11 Central and Eastern European countries in order to see whether the high credit growth recently observed in some of these countries led to above equilibrium private credit-to-GDP levels. We use estimation results obtained for a panel of small open OECD economies (out-of-sample panel) to derive the equilibrium credit level for a panel of transition economies (in-sample panel). We opt for this (out-of-sample) approach because the coe¢ cient estimates for transition economies are fairly unstable. We show that there is a large amount of uncertainty to determine the equilibrium level of private credit. Yet our results indicate that a number of countries are very close or even above the estimated equilibrium levels, whereas others are still well below the equilibrium level. JEL Classification: C31, C33, E44, G21.

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Paper provided by European Central Bank in its series Working Paper Series with number 687.

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Length: 39 pages
Date of creation: Oct 2006
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Handle: RePEc:ecb:ecbwps:20060687

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Related research
Keywords: Credit to the private sector; credit growth; equilibrium level of credit; initial undershooting; transition economies.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Gabor Vadas & Gergely Kiss, 2005. "The Role of the Housing Market in Monetary Transmission," Macroeconomics 0512010, EconWPA. [Downloadable!]
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  3. 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.
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  6. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  7. Inci Ötker & Gudrun Johnsen & Paul Louis Ceriel Hilbers & Ceyla Pazarbasioglu, 2005. "Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies," IMF Working Papers 05/151, International Monetary Fund. [Downloadable!]
  8. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300. [Downloadable!] (restricted)
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  9. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May. [Downloadable!] (restricted)
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  11. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," NBER Working Papers 8249, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
  13. Alessandro Calza & Joao Sousa & Marta Manrique Simon, 2003. "Aggregate loans to the euro area private sector," Working Paper Series 202, European Central Bank. [Downloadable!]
  14. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May. [Downloadable!] (restricted)
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  16. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  18. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
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  19. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  20. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March. [Downloadable!]
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  21. Giovanni Favarra, 2003. "An Empirical Reassessment of the Relationship Between Finance and Growth," IMF Working Papers 03/123, International Monetary Fund. [Downloadable!]
  22. M Pesaran & Yongcheol Shin & Ron P Smith, 2004. "Pooled mean group estimation of dynamic heterogeneous panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Julia Kiraly & Judit Antal & Marton Nagy & Viktor Szabo, 2008. "Retail credit expansion and external finance in Hungary: lessons from the recent past (1998–2007)," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 221-233 Bank for International Settlements. [Downloadable!]
  2. Schnabl, Gunther & Hoffmann, Andreas, 2007. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets - An Overinvestment View," MPRA Paper 5201, University Library of Munich, Germany. [Downloadable!]
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  3. 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. [Downloadable!]
  4. Alexander F. Tieman & Daniel C. L. Hardy, 2008. "Innovation in Banking and Excessive Loan Growth," IMF Working Papers 08/188, International Monetary Fund. [Downloadable!]
  5. 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 CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Olga Arratibel & Reiner Martin & Davide Furceri, 2008. "Real convergence in Central and Eastern European EU member states - which role for exchange rate volatility?," Working Paper Series 929, European Central Bank. [Downloadable!]
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