The Credit Boom in the EU New Member States: Bad Luck or Bad Policies?
46 Pages Posted: 4 Jun 2010
Date Written: May 2010
In the past decade, most of the EU New Member States experienced a severe credit-boom bust cycle. This paper argues that the credit boom-bust cycle was to a large extent the result of factors external to the region (â€œbad luckâ€?). Rapid credit growth followed from a high liquidity in global markets and the particular attractiveness of â€œnew Europeâ€? for capital flows, while the end of the credit cycle was brought about by a global crisis. However, the fact that some countries managed to avoid most of the excesses, including asset price bubbles and foreign exchange lending, suggests that policies and policy failures (â€œbad policiesâ€?)â€”in particular overly expansionary macroeconomic settings and excessively optimistic views on prudential risksâ€”also have played a critical role.
Keywords: Eastern Europe, Capital flows, Credit demand, Credit expansion, Business cycles, Economic reforms, Global Financial Crisis 2008-2009
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