CAPITAL INFLOWS, HOUSEHOLD DEBT AND THE BOOM BUST CYCLE IN ESTONIA

Zuzana Brixiová Schwidrowski, Laura Vartia () and Andreas Woergoetter ()
Authors registered in the RePEc Author Service: Andreas Wörgötter ()

No wp965, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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.

Keywords: capital inflows; credit; household debt; boom-bust cycle; Estonia (search for similar items in EconPapers)
JEL-codes: C2 E3 E62 (search for similar items in EconPapers)
Pages: pages
Date: 2009-07-01
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Capital Inflows, Household Debt and the Boom-bust Cycle in Estonia (2009)
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