Discussion Paper Details

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

Author(s): Fabrizio Coricelli, Fabio Mucci and Debora Revoltella

Publication Date: March 2006

Keyword(s): credit booms, household credit and new members of the European Union

Programme Area(s): Institutions and Economic Performance and International Macroeconomics

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.

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Bibliographic Reference

Coricelli, F, Mucci, F and Revoltella, D. 2006. 'Household Credit in the New Europe: Lending Boom or Sustainable Growth?'. London, Centre for Economic Policy Research.