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

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Listed:
  • Zuzana Brixiova

    (OECD)

  • Laura Vartia

    (OECD)

  • Andreas Wörgötter

    (OECD)

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.

Suggested Citation

  • Zuzana Brixiova & Laura Vartia & Andreas Wörgötter, 2009. "Capital Inflows, Household Debt and the Boom-bust Cycle in Estonia," OECD Economics Department Working Papers 700, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:700-en
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    File URL: http://dx.doi.org/10.1787/224121736171
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    Cited by:

    1. 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.
    2. Sandrine Levasseur, 2011. "Labour market adjustments in Estonia during the global crisis," Working Papers hal-01069525, HAL.
    3. Brzoza-Brzezina, Michał & Makarski, Krzysztof & Wesołowski, Grzegorz, 2014. "Would it have paid to be in the eurozone?," Economic Modelling, Elsevier, vol. 41(C), pages 66-79.
    4. 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).
    5. Jaan Masso & Jaanika Merikull & 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.
    6. Ardo Hansson & Martti Randveer, 2013. "Economic adjustment in the Baltic countries," Chapters,in: A New Model for Balanced Growth and Convergence, chapter 12, pages 190-206 Edward Elgar Publishing.
    7. Dorothee Bohle, 2014. "Post-socialist housing meets transnational finance: Foreign banks, mortgage lending, and the privatization of welfare in Hungary and Estonia," Review of International Political Economy, Taylor & Francis Journals, vol. 21(4), pages 913-948, August.
    8. Jaan Masso & Kerly Krillo, 2011. "Mixed Adjustment Forms and Inequality Effects in Estonia, Latvia and Lithuania," Chapters,in: Work Inequalities in the Crisis, chapter 2 Edward Elgar Publishing.
    9. 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.
    10. David Gray, 2014. "Central European foreign exchange markets: a cross-spectral analysis of the 2007 financial crisis," The European Journal of Finance, Taylor & Francis Journals, vol. 20(6), pages 550-567, June.
    11. 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.
    12. 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.
    13. Michał Brzoza-Brzezina & Jacek Kotłowski & Kamil Wierus, 2015. "Can interest rate spreads stabilize the euro area?," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3696-3709, July.
    14. Ardo Hansson & Martti Randveer, 2013. "Economic adjustment in the Baltic Countries," Bank of Estonia Working Papers wp2013-1, Bank of Estonia.
    15. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.
    16. 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.
    17. Ivo Karilaid & Tõnn Talpsepp & Tarvo Vaarmets, 2014. "Implications of the liquidity crisis in the Baltic-Nordic region," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 14(1-2), pages 35-54, December.
    18. 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.
    19. 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.
    20. 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).
    21. 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.
    22. Juan Carlos Cuestas & Merike Kukk, 2017. "Asymmetries in the interaction between housing prices and housing credit in Estonia," Bank of Estonia Working Papers wp2017-2, Bank of Estonia, revised 25 May 2017.

    More about this item

    Keywords

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

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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