Uncovering the Dynamic Relationship between Credit and Sustainable Economic Growth in Selected CEE Countries

Adam Altăr,Matei Nicolae Kubinschi,Alina Zaharia

doi:10.3390/su13116349

Abstract

Establishing a functional financial sector has been one of the pillars of transition to a functional market economy over the last three decades in the CEE region. The present paper provides a comprehensive analysis of the relationship between credit and economic growth in selected CEE countries, namely, Czechia, Romania, Poland and Hungary, aiming to answer questions related to (i) the role of the banking sector in fostering sustainable economic growth and the causality direction between the financial and real sector, (ii) the relationship between consumption and investment and certain categories of loans and (iii) the identification of loan supply shocks and their role in explaining the dynamics associated with other macroeconomic variables. Using a time-varying parameter structural vector autoregression model with stochastic volatility (TVP-SVAR) and sign restrictions, we identify a non-financial corporations (NFC) credit supply shock and an investment shock. Potential policy solutions to ensure a sound contribution of the financial sector to economic growth in the analyzed economies relate to the strong relationship identified between the two variables. From this perspective, the study is among the first to employ a robust dynamic framework for assessing the role of the financial sector in fostering sustainable economic growth in European emerging market economies.

Highlights

Macroeconomic variables related to real GDP, consumption and investment were extracted from the Eurostat database, while information related to credit, both on an aggregate and sectoral basis were extracted from the central banks websites
The results for the constant and slope extracted from the rolling window regressions (Figure 3), indicate that the relationship between real GDP and total credit growth rates is relatively stable in the pre-crisis period for all the economies included in the study, followed by an increase after 2009
It is very interesting to notice that Romania, Czechia and Hungary experienced inversion episodes, indicating periods of creditless recovery, when the economic activity was bolstered by measures from other policy areas

Summary

Introduction

Over the last decades and in the context of globalization, the relationship between economic development and financial intermediation has become increasingly tighter. During episodes of turmoil such as the Global Financial Crisis, the financial sector can potentially become a source of systemic risk amplification through contagion effects or through a severe contraction in the supply of credit and, as a result, significantly affect the real economy. Analyzing the relationship between the financial sector and the real economy in Central and Eastern Europe warrants a thorough understanding of the significant structural changes the studied economies have experienced over the last three decades. In this regard, this paper focuses on the cases of Czechia, Romania, Hungary and Poland. Other important milestones were the capital account liberalization process, the EU accession which triggered high capital inflows in the run up to the Global Financial Crisis, the period of economic rebalancing following the crisis and the renewed economic growth period accompanied by an upturn in the financial cycle

Methods

Results

Conclusion