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

Gergely Kiss (), Márton Nagy () and Balázs Vonnák
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Gergely Kiss: Magyar Nemzeti Bank
Márton Nagy: Magyar Nemzeti Bank

No 2006/10, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

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.

Keywords: financial deepening; credit growth; transition economies; panel econometrics; endogeneity bias. (search for similar items in EconPapers)
JEL-codes: E44 O16 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (82)

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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2006/10

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