Do capital flows drive credit growth and consumption in Central and Eastern Europe?. Issue 1 (2nd January 2019)

• Record Type: Journal Article
• Authors: Hegerty, Scott W.
• Is Part Of: Post-communist economies. Volume 31:Issue 1(2019)
• Page Start: 36
• Page End: 51
• Publication Date: 2019-01-02
• Subjects: Domestic credit -- capital flows -- consumption -- Central and Eastern Europe -- time series; Post-communism -- Economic aspects -- Periodicals; Russia (Federation) -- Economic conditions -- Periodicals; Europe, Eastern -- Economic conditions -- Periodicals; 330.91717
• DOI: 10.1080/14631377.2018.1461516
• Languages: English
• ISSNs: 1463-1377

Abstract

Abstract: Domestic credit expansion in CEE economies, fuelled in part by foreign capital inflows, helped increase household welfare before the 2008 financial crisis caused a contraction across the region. How strong are the linkages between the current account, domestic credit and consumer spending? This study compiles a quarterly dataset of domestic credit as a share of GDP for 11 CEE European Union members and isolates structural breaks in the series' growth rates that often align with the 2008 crisis. Vector autoregressive methods, particularly impulse response functions, show that increased current-account deficits lead to increased consumption in six of the 11 countries and increased credit growth in three, and that shocks to credit growth increase consumption in six countries. Capital inflows significantly increase consumption through domestic credit in Slovenia, while the Baltics show a large share of significant effects.