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

Author

Listed:
  • Gergely Kiss

    () (Magyar Nemzeti Bank)

  • Márton Nagy

    () (Magyar Nemzeti Bank)

  • Balázs Vonnák

    () (Magyar Nemzeti Bank)

Abstract

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.

Suggested Citation

  • 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 (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2006/10
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    File URL: http://www.mnb.hu/letoltes/wp2006-10.pdf
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    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    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. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 111-155.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    financial deepening; credit growth; transition economies; panel econometrics; endogeneity bias.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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