Commodity prices and domestic credit in Central and Eastern Europe: Are there asymmetric effects?

Abstract

Fluctuations in commodity prices can have an impact on a firm’s costs and revenues, national income, or a country’s creditworthiness, leading to increased borrowing and levels of domestic credit. These effects need not be symmetric; it is possible that losses due to a commodity price decrease might be worse than the gains that result from an equivalent price increase. In addition, these dynamics might differ between frequently studied commodity exporters and energy importers such as those in Central and Eastern Europe. Here, an index of commodity prices and their volatility are included in a time-series model alongside the traditional macroeconomic determinants for 11 of these EU members. Forecast Error Variance Decompositions reveal that shocks to commodity prices spill over most strongly to inflation in Latvia and credit growth in Poland and Slovakia—the two countries that have seen continuous increases in credit. Cointegration analysis shows that while GDP growth and inflation drive credit levels in many cases, commodity price increases lead to increased credit shares in the Czech Republic, Latvia and Lithuania. A nonlinear model finds that commodity price increases also increase credit in Romania, while decreases lead to increased credit shares in Hungary. Commodity price volatility leads to credit increases in Latvia and Lithuania, confirming that these two Baltic countries are most affected by macroeconomic shocks.