Working Paper: CEPR ID: DP7027
Authors: Barry Eichengreen; Katharina Steiner
Abstract: We ask whether Poland is at risk of the boom-bust problem that has afflicted economies around the time of euro adoption. Our answer, inevitably, is mixed. On the one hand the fact that Poland is an outlier, credit-growth wise, accentuates the danger of a boom if one believes in mean reversion. Our econometrics indicate that the fall in interest rates that will flow from expectations of euro adoption will further feed that boom. On the other hand the fact that interest rates have already converged part way to euro-area levels (and more extensively than in earlier adopters that experienced a sharp fall in rates and a pronounced credit boom), especially in the case of lending to firms, suggests that this shock may be less intense in Poland. And it is certainly conceivable that the same policies and country characteristics (not always visible to the econometrician) that have restrained credit growth in the past may continue to do so in the future. The broader literature also points to two set of factors, the first of which makes the danger of an unsustainable credit boom more immediate, the second of which makes it more remote. In the first category are the continuing limitations of the supervisory framework and the weakness of the finance minister in the budget-making process. In the second are a record of rigorous prudential supervision and the existence of relatively competitive labor markets.
Keywords: euro; Poland
JEL Codes: F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| falling interest rates (E43) | increased borrowing (H74) |
| euro adoption expectations (F36) | falling interest rates (E43) |
| supervisory framework's limitations and government's fiscal policies (E62) | exacerbated risk of a boom (E32) |
| historical prudential measures and competitive labor markets (J48) | mitigated risk of a boom (E32) |
| interest rates convergence (E43) | stimulate credit demand (E51) |
| Poland's credit growth normalization (E69) | unsustainable credit expansion (F65) |