Does Supply or Demand Drive the Credit Cycle? Evidence from Central, Eastern, and Southeastern Europe

Abstract

Countries in Central, Eastern, and Southeastern Europe (CESEE) experienced a credit boombust cycle in the last decade. This paper analyzes the roles of demand and supply factors in explaining this credit cycle. Our analysis first focuses on a large sample of bank-level data on credit growth for the entire CESEE region. We complement this analysis by five case studies (Latvia, Lithuania, Montenegro, Poland, and Romania). Our results of the panel data analysis indicate that supply factors, on average and relative to demand factors, gained in importance in explaining credit growth in the post-crisis period. In the case studies, we find a similar result for Lithuania and Montenegro, but the other three case studies point to the fact that country experiences were heterogeneous.

Determinants of private sector credit in Uganda: the role of mobile money

“…As expected, they also relate negatively and positively respectively, to private sector credit. The negative effect of CPI on private sector credit growth supports the findings of (Everaert et al 2015) and implies that inflation reduces bank lending by raising the cost of doing business.…”

“…Credit channel models identify two supply-side channels, bank lending and balance sheets that respectively measure the effects of changes in banks' financial positions and of borrowers on the availability of credit (Goyal et al 2011). Studies based on these two credit channels identify four supply-side determinants of bank credit: the macro-economy, monetary policy, credit to the public sector and bank characteristics ( (Carey 1998); (Gozgor 2014); (Everaert et al 2015); (Rabab'ah 2015)). Empirical studies concerning their effects produce broadly similar results consistent with economic theory, although they document country-specific differences.…”

“…In their investigation of the credit cycle, (Everaert et al 2015) include the exchange rate in their panel estimation to reflect that 400 banks in 20 Central and Southern European countries held significant quantities loans denominated in foreign currencies. However, they find no significance for the exchange rate, which they attribute to a high Fig.…”

Household Credit, Global Financial Cycle, and Macroprudential Policies: Credit Register Evidence from an Emerging Country

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Delayed Credit Recovery in Croatia: Supply or Demand Driven?

“…The final set of explanatory variables is mainly determined by their statistical significance and economic relevance. This is in line with Everaert et al (2015) who use a similar model to assess the determinants of credit demand and supply in five CEE countries where the choice of explanatory variables is determined by a priori exclusion restrictions, along with pragmatism. Following that, insignificant variables are dropped from the regressions unless explicitly stated in order to improve the stability of the estimation results that are somewhat sensitive to the model specification and the choice of variables used.…”