No abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

This paper builds on a comprehensive dataset for Peru that merges municipal fiscal accounts with information about municipalities' characteristics such as population, poverty, education and local politics to analyze the leading factors affecting the ability of municipalities to execute the allocated budget. According to the existing literature and the Peruvian context, we divide these factors into four categories: the budget size and allocation process; local capacity; local needs; and political economy constraints. While we do find that all four factors affect decentralization, the largest determinant of spending ability is the adequacy of the budget with respect to local capacity. The results confirm the need for decentralization to be implemented gradually over time in parallel with strong capacity building efforts.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Credit growth in Central and SouthEastern European countries has accelerated in recent years. While low starting levels of financial intermediation help to explain the speed of credit growth, the fast pace of credit growth raises concerns from a financial and macroeconomic stability perspective. Yet, there is only a limited empirical literature on the determinants of these episodes of fast credit growth. This paper provides an econometric analysis of the macroeconomic determinants of the growth of credit for Bulgaria, Croatia, Romania and the 8 transition countries that joined the EU in May 2004. In the absence of a generally-accepted way of determining what rate of credit growth may be deemed to be "excessive," the paper proposes a new approach to address this question. The contribution of this paper is to provide a measure of the excessiveness of credit growth while explicitly accounting for the catching up process in incomes associated with the transition from planned to market economies. To do so we model credit growth as a function of both macroeconomic fundamentals and the gap between the actual credit-to-GDP ratio and an equilibrium level. This simple model allows us to derive short-run credit elasticities as well as estimates of expected credit growth. We then compare the latter with actual credit growth, which provides us with a test to determine its "excessiveness." Due to data availability we undertake two sets of estimates of the short-run credit elasticities, based on a group of benchmark countries and on the countries of the region respectively. Although tentative, the conclusions that emerge suggest that credit growth in a number of countries in the region cannot be fully explained by their fast economic growth, declining interest rates or the catching-up in incomes. In particular, countries with fixed exchange rate regimes seem to have experienced credit growth well above what would have been expected given its main determinants. * The views expressed here are those of the authors and do not necessarily represent the views of the European Central Bank or the Eurosystem. The authors would like to thank Arnaud Mehl, Adalbert Winkler and participants at the IMF-National Bank of Romania conference on rapid growth of banking sector credit to the private sector held in Sinaia on 7-8 October 2005 for useful comments. The authors are also grateful to Evan Kraft, Croatian National Bank, for his assistance with Croatian data on loans in foreign currency and to Calin Arcalean for the dataset on loans and deposits in foreign currency.