TAILIEUCHUNG - Credit Growth in Central and Eastern Europe: Emerging from Financial Repression to New (Over)Shooting Stars?

This paper analyses the equilibrium level of private credit to GDP in 11 Central and Eastern European (CEE) countries on the basis of a number of dynamic panels containing quarterly data on CEE economies, emerging markets and developed OECD countries. In doing so, we propose a unify- ing framework which includes factors driving both the demand for and the supply of private credit. We emphasise that relying on in-sample panel estimates for transition economies is problematic not only because of the possible upward bias of the estimated constant and slope coe¢ cients due to the initial undershooting and the ensuing steady adjustment towards equilibrium, but also because of instabilitiy. | Credit Growth in Central and Eastern Europe Emerging from Financial Repression to New Over Shooting Stars Balázs Égert Peter Backéy Tina Zumer z x December 14 2005 Abstract This paper analyses the equilibrium level of private credit to GDP in 11 Central and Eastern European CEE countries on the basis of a number of dynamic panels containing quarterly data on CEE economies emerging markets and developed OECD countries. In doing so we propose a unifying framework which includes factors driving both the demand for and the supply of private credit. We emphasise that relying on in-sample panel estimates for transition economies is problematic not only because of the possible upward bias of the estimated constant and slope coefficients due to the initial undershooting and the ensuing steady adjustment towards equilibrium but also because of instabilitiy of the equations estimated for transition economies. The use of out-of-samples suggests that some of the transition economies might have already come close to equilibrium by 2004 whereas others have private credit to GDP ratios which are well b elow the level what the fundamentals would justify. JEL classification C31 C33 E44 G21 Keywords credit to the private sector credit growth equilibrium level of credit initial undershooting transition economies Oesterreichische Nationalbank EconomiX at the University of Paris X-Nanterre and William Davidson Institute. and begert@ yOesterreichische Nationalbank European Central Bank xWe are indebted to Caralee McLiesh for sharing with us the dataset used in the paper Private credit in 129 countries NBER Working Paper No. 11078 to Ivanna Vladkova-Hollar for providing us with the financial liberalisation indicator to Gergo Kiss for sharing data on housing prices in Hungary and Rafal Kierzenkowski Lubos Komárek Mindaugas Leika and Peeter Luikmel for help in obtaining housing prices for France the Czech Republic .

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