3/2019 Juan Carlos Cuestas, Yannick Lucotte, Nicolas Reigl. The evolution and heterogeneity of credit procyclicality in Central and Eastern Europe
Working Papers of Eesti Pank 3/2019
This paper presents empirical estimates of bank credit procyclicality for a sample of 11 Central and Eastern Europe countries (CEECs) for the period 2000Q1–2016Q4. In the ﬁrst step we estimate a traditional-type panel VAR model and analyse the evolution of credit procyclicality in the CEECs by comparing the impulse response functions for diﬀerent business cycle periods. The results conﬁrm the existence of credit procyclicality in CEECs and show that procyclicality is higher during boom periods. Furthermore we observe the heterogeneity of credit procyclicality in the diﬀerent countries in our sample. To explain the cross-country heterogeneity in credit procyclicality we construct an interacted panel VAR model (IPVAR) and analyse whether bank level competition, proxied by the aggregate Lerner index, constitutes a driving force of credit procyclicality. Our ﬁndings indicate that bank competition aﬀects credit procyclicality and explains the diﬀerences in credit dynamics across CEECs. Speciﬁcally we show that the reaction of credit to a GDP shock is on average higher in a less competitive banking market.
JEL classiﬁcation: E32, E51, G20, D40, C33
Keywords: credit cycle, business cycle, bank competition, interacted panel VAR, CEEC
The views expressed are those of the authors and do not necessarily represent the official views of the Eesti Pank or the Eurosystem.