3/2004 Märten Kress. Lending cycles in Estonia

Working Papers of Eesti Pank. No 3, 2004

The objective of this paper is to examine possible cyclical patterns in the lending behavior of Estonian commercial banks. Furthermore, the degree of cycle synchronization between the business cycle and the credit cycle and how much one cycle is behind the other in the case of Estonia is of particular interest. The paper uses data from between January 1994 and February 2004 to identify the Estonian business and credit cycles and compare their features. A Markov regime-switching technique was used in dating both business and credit cycles. Variables of interest in terms of the credit cycle include the total amount of loans provided by commercial banks, household loans, corporate loans, and the share of overdue loans in the total portfolio. Both, monthly and quarterly data was utilized to double-check the results and the business cycle was dated using the Industrial Production Index (IPI) and GDP, respectively. The share of overdue loans in the total portfolio appeared to be counter-cyclical as expected. Changes in the IPI seemed to cause changes in corporate loans with a two-quarter lag on average. Asymmetries between the credit and business cycles were found for Estonia. That is, it takes approximately five months from the beginning of an economic slowdown before corporate loans move into a contraction regime. However, it takes approximately eight months for corporate loans to recover their expansionary growth rate. Changes in household loans seemed to precede changes in economic activity by approximately one quarter.

* Department of Economics, University of Aarhus, Denmark. This research was carried out during the three-month period the author spent in Eesti Pank as a visiting researcher. The author is grateful to Aurelijus Dabusinskas, Reimo Juks, Martti Randveer, Rasmus Kattai, John Lewis, Peeter Luikmel, Lenno Uusküla, Jana Kask, David Mayes as well as seminar participants in Eesti Pank for useful comments and suggestions. The author would also like to thank Kadri Männasoo for help with data.

Author's e-mail address: mkress. [at] epbe.ee

The views expressed are those of the author and do not necessarily represent the official view of Eesti Pank.


1. Theoretical Underpinnings
1.1. Overview of Cycle Dating Methods
1.2. Linkages with Credit Channel Theory
2. Preliminary Data Assessment
2.1. Overview of the Data
2.2. Graphical Analysis of Co-movements in Quarterly Data
3. Estimations and Results
3.1. Identification of Cycles
3.2. Modeling Lending Behaviour
4. Conclusions

Lending Cycles in Estonia, Working Papers of Eesti Pank No 3, 2004 (PDF*)

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