Working Paper: CEPR ID: DP5520
Authors: Fabrizio Coricelli; Fabio Mucci; Debora Revoltella
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; new members of the European Union; household credit
JEL Codes: D14; E21; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints (E41) | consumption volatility (E20) |
| credit growth (E51) | macroeconomic imbalances (F41) |
| credit growth (E51) | consumption (E21) |
| liquidity constraints (E41) | credit directed towards households (G51) |
| current trends in household credit markets (G51) | underlying vulnerabilities (F65) |
| household credit growth (G51) | deterioration of the trade balance (F14) |