Exploring the Steady-State Relationship Between Credit and GDP for a Small Open Economy: The Case of Ireland

Abstract

Information on all of the papers published in the ECB Working Paper Series can be found on the ECB's website, http://www.ecb. europa.eu/pub/scientific/wps/date/html/index.en.html Macroprudential Research NetworkThis paper presents research conducted within the Macroprudential Research Network (MaRs). The network is composed of economists from the European System of Central Banks (ESCB), i.e. the national central banks of the 27 European Union (EU) Member States and the European Central Bank. The objective of MaRs is to develop core conceptual frameworks, models and/or tools supporting macro-prudential supervision in the EU.The research is carried out in three work streams: 1) Macro-financial models linking financial stability and the performance of the economy; 2) Early warning systems and systemic risk indicators; 3) Assessing contagion risks.MaRs is chaired by Philipp Hartmann (ECB). Paolo Angelini (Banca d'Italia), Laurent Clerc (Banque de France), Carsten Detken (ECB), Simone Manganelli (ECB) and Katerina Šmídková (Czech National Bank) are workstream coordinators. Javier Suarez (Center for Monetary and Financial Studies) and Hans Degryse (Katholieke Universiteit Leuven and Tilburg University) act as external consultants. Fiorella De Fiore (ECB) and Kalin Nikolov (ECB) share responsibility for the MaRs Secretariat.

The functioning of the credit market in the European Union and the consequences of legal regulations regarding the cost of credit on the example of Poland

“…Regardless of type of country's economy (emerging market economy or Euro area), loans play an extremely important role. From a macro prudential perspective, the ratio of private sector cre dit to GDP has become an increasingly popular benchmark of the sustainable levels of cre dit (Kelly et al, 2011). Most recently, the Basel Committee on Banking Super vision «has issued a proposal to incorporate this approach into the regulatory system by using the deviation from long-run trend of the PSC/GDP ratio (the «credit gap») to calibrate a countercyclical capital buf fer.…”

Countercyclical Capital Buffer: Building the Resilience or Taming the Rapid Financial Cycle?

“…Voluminous research also has mentioned CCB as an effective tool in building bank resilience and mitigating vulnerability risk (Jiménez et al, 2012;Jokivuolle et al, 2015). Kelly (2013) analyzed the credit to GDP steady-state in Ireland and found a rapid growth of loans before the financial crisis occurred. Joukiville (2015) found that the debt losses increased during the recession if the country had excessive debt.…”

“…In the last decade, most European economies have been excellent examples of excessive credit growth. Based on Kelly (2013), in Ireland, the increase in the private sector goes hand in hand with the house price and activities in such industry. The amount of mortgage in last decade is going two-fold, for example, 50000 mortgages in Ireland in 1995 increase to 125000 in 2005, including the average from 56000 Euro to 231 000 Euro.…”

“…Credit plays a significant role in the development of the economy (Akram, 2014;Jokivuolle et al, 2015;Kelly et al, 2013;Schüler, 2020). Thanks to credit, small-medium enterprises, large corporations, and government can run their economic activities.…”

“…Generally, during the upswing, credit tends to increase. These practices become common because economic agents tend to underestimate the risk in lending (Kelly et al, 2013). Meanwhile, in the bank balance sheet, the growth of asset price gives the potential opportunity for a bank to increase its loan.…”