Household Credit in the New Europe: Lending Boom or Sustainable Growth?

Fabrizio Coricelli (), Fabio Mucci and Debora Revoltella

No 5520, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Retail lending grew very fast in the New Europe region in the last years, prompting a debate on whether such a rapid growth can be considered sustainable. This paper investigates the main determinants of retail lending growth throughout the region. It tries to identify episodes of credit boom and analyzes the possible correlation between such booms, consumption booms and a country external account position. Estimating an aggregate consumption function, under the assumption of liquidity-constrained households, the paper finds that current trends in household credit markets largely reflect an equilibrium phenomenon, in which household credit increases rapidly from extremely low initial levels, in the context of a relaxation of liquidity constraints. The rate of growth of credit responds to changing market conditions on the supply side and to good prospects for income growth. In such an environment, loosening credit market conditions can have sizable effects on consumption, which, in some cases may create macroeconomic imbalances, both in terms of current account deficits and inflationary pressures.

Keywords: credit booms; household credit; new members of the European Union (search for similar items in EconPapers)
JEL-codes: D14 E21 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-mac
Date: 2006-03
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