Too Much of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.Rapid credit growth in Bulgaria, Romania, and Ukraine has been driven by successful macroeconomic stabilization, robust growth, and capital inflows. While financial deepening is both expected and welcome, the recent expansions appear to have been excessive, as evidenced by widening current account deficits in Bulgaria and Romania, and prudential concerns in Ukraine. Policy responses have included attempts to both moderate credit growth and offset its impact on domestic demand, with mixed success thus far.

The role of household and business credit in banking crises

“…That could happen if economic agents misperceive a temporary economic boom for a long-term shift in economic potential. Unfortunately, as Duenwald et al (2005) argue, such misperceptions are quite common.…”

Credit booms, monetary integration and the new neoclassical synthesis

“…Recent studies on the factors driving credit growth in nMS corroborate that falling interest rates certainly are a key factor that has spurred credit growth in Central and Eastern Europe (see e.g. Backé and Zumer, 2005). Declining interest rates in the region are a consequence of macroeconomic stabilization and of financial sector reforms.…”

“…Terrones and Mendoza, 2004;Gaurichas et al, 2001;Backé and Zumer, 2005). example, some authors emphasize the role of real business cycles caused by technological or terms-of-trade shocks.…”

The exchange rate as nominal anchor: A test for Ukraine

“…McKinnon and Pill (2000) recognize the excess demand for USD credits by its flip side: the ''overborrowing'' of the banking system from international lenders. Duenwald et al (2005) raises this red flag as well in speaking of the ''credit boom'' in Ukraine. In Conway (2007) I point out that the credit boom was in fact fueled by a larger ''saving boom'' during this period, but that there is a mismatch in currencies between saving and investment.…”