Macroeconomic imbalances and the eurozone crisis: the impact of credit expansion on asset prices

Gökçer Özgür and Emel Memis¸
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Gökçer Özgür: Department of Economics, University of Utah, Salt Lake City, UT, USA and Department of Economics, Hacettepe University, Ankara, Turkey
Emel Memis¸: Department of Economics, Ankara University, Ankara, Turkey
Authors registered in the RePEc Author Service: Gokcer Ozgur

Review of Keynesian Economics, 2017, vol. 5, issue 3, 459-480

Abstract: The economic crisis of the eurozone emerged after the subprime mortgage crisis of the US; and since then the fiscal profligacy of some member countries, primarily Greece at the outset, was seen as the root of the crisis. However, alternative approaches pointed to the current-account imbalances within the eurozone, and the flaws in the architecture of the eurozone system. In this study, based on the argument that these flaws and resulting trade imbalances had been responsible for a credit-fueled asset-price speculation among deficit countries, we aim to establish empirically the close association of asset-price growth with credit creation. As imbalances continued, asset prices grew dependent on credit expansion, and once it was disrupted, the collapse came. For our purpose, we examine the impacts of credit expansion on asset prices and use dynamic panel estimations for eleven countries in the eurozone over the period 1990–2011. We find that the credit expansion and asset prices are closely associated in countries with chronic trade deficits whereas no significant correlation is observed for countries with trade surpluses.

Keywords: credit expansion; asset prices; eurozone crisis; macroeconomic imbalances (search for similar items in EconPapers)
JEL-codes: E42 E65 F34 F36 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Macroeconomic Imbalances and the Eurozone Crisis: The Impact of Credit Expansion on Asset Prices (2015)
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