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Credit Growth in Central and Eastern Europe: Convergence or Boom?

  • Gergely Kiss

    ()

    (Magyar Nemzeti Bank)

  • Márton Nagy

    ()

    (Magyar Nemzeti Bank)

  • Balázs Vonnák

    ()

    (Magyar Nemzeti Bank)

Credit to the private sector has been growing very rapidly in a number of Central and Eastern European countries in recent years. The main question is whether this dynamics is an equilibrium convergence process or may rather pose stability risks. Using panel econometric techniques, this paper attempts to identify the equilibrium credit/GDP levels of the new EU countries, disentangling the observed growth into an equilibrium trend and an excess (boom) component. In the paper the pooled mean group estimator was used for its flexibility and efficiency. Using instrumental variable technique we tested whether long run endogeneity affects the consistency. The estimations show that large part of the credit growth in new member states can be explained by the catching-up process, and, in general, credit/GDP ratios are below the levels consistent with macroeconomic fundamentals. However, in Latvia and Estonia credit growth is found to be significantly faster than what would be justified along the equilibrium path.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbfuzetek/mnben_wp2006_10/wp2006_10.pdf
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Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2006/10.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:mnb:wpaper:2006/10
Contact details of provider: Web page: http://www.mnb.hu/

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  1. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," CESifo Working Paper Series 755, CESifo Group Munich.
  2. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
  3. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
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