Household Credit in the New Europe: Lending Boom or Sustainable Growth?

30 Pages Posted: 9 Jun 2006

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Fabio Mucci

UniCredit Group

Debora Revoltella

UniCredit Group

Date Written: March 2006

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, household credit, new members of the European Union

JEL Classification: D14, E21, E44

Suggested Citation

Coricelli, Fabrizio and Mucci, Fabio and Revoltella, Debora, Household Credit in the New Europe: Lending Boom or Sustainable Growth? (March 2006). CEPR Discussion Paper No. 5520, Available at SSRN: https://ssrn.com/abstract=907467

Fabrizio Coricelli (Contact Author)

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fabio Mucci

UniCredit Group ( email )

Via Tortona 33
Milan, 20121
Italy

Debora Revoltella

UniCredit Group ( email )

Via Tortona 33
Milan, 20121
Italy
+39 02 4762 4053 (Phone)
+39 02 4762 4057 (Fax)

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