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The evolution and heterogeneity of credit procyclicality in Central and Eastern Europe

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Listed:
  • Juan Carlos Cuestas
  • Nicolas Reigl

  • Yannick Lucotte

Abstract

This paper presents empirical estimates of bank credit procyclicality for a sample of 11 Central and Eastern Europe countries (CEECs) for the period 2000Q1–2016Q4. In the first step we estimate a traditional-type panel VAR model and analyse the evolution of credit procyclicality in the CEECs by comparing the impulse response functions for different business cycle periods. The results confirm the existence of credit procyclicality in CEECs and show that procyclicality is higher during boom periods. Furthermore we observe the heterogeneity of credit procyclicality in the different countries in our sample. To explain the cross-country heterogeneity in credit procyclicality we construct an interacted panel VAR model (IPVAR) and analyse whether bank level competition, proxied by the aggregate Lerner index, constitutes a driving force of credit procyclicality. Our findings indicate that bank competition affects credit procyclicality and explains the differences in credit dynamics across CEECs. Specifically we show that the reaction of credit to a GDP shock is on average higher in a less competitive banking market.

Suggested Citation

  • Juan Carlos Cuestas & Nicolas Reigl & Yannick Lucotte, 2019. "The evolution and heterogeneity of credit procyclicality in Central and Eastern Europe," Bank of Estonia Working Papers wp2019-03, Bank of Estonia, revised 01 Nov 2019.
    • Handle: RePEc:eea:boewps:wp2019-03
    DOI: 10.23656/25045520/032019/0165
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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