Credit Growth in Central and Eastern Europe

This thesis focuses on the development of credit to the private sector in the Central and Eastern European (CEE) countries. Although the speed of credit growth in these countries has recently slowed down as the consequence of the global financial crisis, the overall increase in credit to the private sector over the past decades has been immense. As a result, the thesis examines whether this substantial increase in credit is linked to the convergence of the CEE countries towards the equilibrium or whether it represents an excessive credit growth that could threaten the macroeconomic and financial stability in these countries. We estimate the equilibrium credit levels for 11 transition countries by applying a dynamic panel data model. Since in-sample approach may bias the estimation results we perform the estimates out-of-sample using a panel of selected developed EU countries as a benchmark. The difference between the actual and estimated credit-to-GDP ratios serves as a measure of private credit excessiveness. The results indicate a slightly excessive or close to the equilibrium credit-to-GDP ratios in Bulgaria, Estonia, and Latvia prior to the financial crisis. With regard to the significant decline in GDP during the crisis this measure of credit excessiveness in these countries have further increased