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Capital Inflows, Household Debt and the Boom-bust Cycle in Estonia

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  • Zuzana Brixiova
  • Laura Vartia
  • Andreas Wörgötter

Abstract

From 2000 to 2007, Estonia was one of the fastest growing emerging market economies. A housing boom, fuelled by capital inflows and credit, resulted in skyrocketing house prices and an over-expanded construction sector. However, the currency board limited the Bank of Estonia’s ability to curb credit growth, while the fiscal policy framework amplified the cycle through pro-cyclical spending increases and tax cuts. As credit was mostly financed by cross-border loans from foreign banks, the risks of disruptions to credit flows and financial contagion have increased. Some have already materialised through tightened lending standards and capital outflows. Estonia is now in a severe recession. To restore high and sustainable growth, the country will need to rebalance its resources from non-tradables towards exports. Regaining external competitiveness will be challenging, however, given the fixed exchange rate and recent devaluations in partner countries. Flexibility of the economy will thus be crucial. Over the medium term, policymakers could also strengthen incentives for a better functioning of the housing finance market and gradually remove the pro-cyclical bias of fiscal policy. Entrée de capitaux, endettement des ménages et alternance expansion-contraction en Estonie Entre 2000 et 2007, l’Estonie a été l’une des économies de marché émergentes qui ont connu la plus forte croissance. Une rapide progression de l’investissement privé, surtout dans l’immobilier résidentiel, a été alimentée par les entrées de capitaux et par le crédit. En conséquence, les prix immobiliers se sont envolés et le secteur de la construction s’est surdéveloppé. Le système de caisse d’émission a toutefois limité les possibilités d’action qui s’offraient à la Banque d’Estonie pour freiner la croissance rapide du crédit. Parce que le crédit était essentiellement financé par les prêts transnationaux que consentaient les banques mères étrangères, les risques d’arrêt brutal et de contagion financière se sont aggravés. Certains de ces risques se sont déjà concrétisés par un durcissement des conditions de prêt et par des sorties de capitaux. L’Estonie est maintenant en proie à une sévère récession. Son PIB réel s’est contracté de 3.6 % en 2008 et de 9.7 % au quatrième trimestre par rapport à la même période de 2007. Pour en revenir à une croissance forte et durable, l’Estonie devra rééquilibrer ses ressources en favorisant l’exportation par rapport au secteur non exportateur (en particulier la construction et l’immobilier). Mais il sera difficile de rétablir la compétitivité extérieure sachant que le taux de change est fixe et que plusieurs pays partenaires ont récemment dévalué. La flexibilité de l’économie sera cruciale. A moyen terme, il faudrait aussi renforcer l’incitation à un meilleur fonctionnement du marché du financement du logement.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 700.

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Date of creation: 27 May 2009
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Handle: RePEc:oec:ecoaaa:700-en

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Keywords: household debt; credit; capital inflows; boom-bust cycle; Estonia; entrées de capitaux; crédit; endettement des ménages; cycle expansion-contraction; Estonie;

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References

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  1. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jaan Masso & Jaanika Meriküll & Priit Vahter, 2011. "Gross profit taxation versus distributed profit taxation and firm perfomance : effects of Estonia,s corporate income tax reform," Bank of Estonia Working Papers wp2011-02, Bank of Estonia, revised 27 Apr 2011.
  2. Josef C. Brada & Trajko Slaveski, 2012. "Transition in a Bubble Economy," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 48(S4), pages 7-13, November.
  3. Jaan Masso & Kerly Krillo, 2011. "Labour Markets In The Baltic States During The Crisis 2008-2009: The Effect On Different Labour Market Groups," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 79, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  4. Sandrine Levasseur, 2011. "labour markets adjustments in Estonia during the global crisis," Documents de Travail de l'OFCE 2011-25, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Sandrine LEVASSEUR, 2012. "Labour market adjustments in Estonia during the 2008/2011 crisis," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 123-143, June.
  6. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.
  7. Masso, Jaan & Meriküll, Jaanika & Vahter, Priit, 2013. "Shift from gross profit taxation to distributed profit taxation: Are there effects on firms?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1092-1105.
  8. A. Bethlendi, 2011. "Policy measures and failures on foreign currency household lending in central and eastern Europe," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 61(2), pages 193-223, June.
  9. Ivo Karilaid & Tõnn Talpsepp, 2010. "Can policy improve liquidity during a financial crisis?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 10(2), pages 5-26, December.
  10. Gedeon Shirley, 2010. "The Political Economy of Currency Boards: Case of Bosnia and Herzegovina," South East European Journal of Economics and Business, De Gruyter Open, vol. 5(2), pages 7-20, November.
  11. Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, vol. 25(1), pages 35-69, February.
  12. Anne Lauringson, 2011. "Unemployment Benefits In A Period Of Crisis: The Effect On Unemployment Duration," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 82, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  13. Ardo Hansson & Martti Randveer, 2013. "Economic adjustment in the Baltic Countries," Bank of Estonia Working Papers wp2013-1, Bank of Estonia.
  14. Jaan Masso & K. Espenberg & Anu Masso & I. Mierina & Kaia Philips, 2013. "GINI Country Report: Growing Inequalities and their Impacts in the Baltic States Estonia, Latvia, Lithuania," GINI Country Reports baltics, AIAS, Amsterdam Institute for Advanced Labour Studies.
  15. Sandrine Levasseur, 2011. "Labour market adjustments in Estonia during the global crisis," Sciences Po publications 2011-25, Sciences Po.

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