Can Italy Grow Out of its NPL Overhang? A Panel Threshold Analysis

18 Pages Posted: 12 May 2017

See all articles by Kamiar Mohaddes

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department

Anke Weber

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2017

Abstract

This paper examines whether a tipping point exists for real GDP growth in Italy above which the ratio of non-performing loans (NPLs) to total loans falls significantly. Estimating a heterogeneous dynamic panel-threshold model with data on 17 Italian regions over the period 1997-2014, we provide evidence for the presence of growth-threshold effects on the NPL ratio in Italy. More specifically, we find that real GDP growth above 1.2 percent, if sustained for a number of years, is associated with a significant decline in the NPLs ratio. Achieving such growth rates requires decisively tackling long-standing structural rigidities and improving the quality of fiscal policy. Given the modest potential growth outlook, however, under which banks are likely to struggle to grow out of their NPL overhang, further policy measures are needed to put the NPL ratio on a firm downward path over the medium term.

Keywords: Italy, Europe, nonperforming loans, real output growth, panel tests of threshold effects, Models with Panel Data, Financial Markets and the Macroeconomy

JEL Classification: C23, E44, G33

Suggested Citation

Mohaddes, Kamiar and Raissi, Mehdi and Weber, Anke, Can Italy Grow Out of its NPL Overhang? A Panel Threshold Analysis (March 2017). IMF Working Paper No. 17/66, Available at SSRN: https://ssrn.com/abstract=2967421

Kamiar Mohaddes (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/mehdiraissi/

Anke Weber

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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