http://orcid.org/0000-0002-8490-5178
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ABSTRACT
This paper explores the finance–growth nexus in 14 countries from Central, Eastern and South-eastern Europe (CESEE) over the 1995–2015 period. It investigates whether including two ‘non-standard’ variables, i.e. a credit cycle dummy and foreign bank relevance, deepens our understanding of the role of a typical financial determinant of economic growth, i.e. bank credit. We find evidence of a negative impact of bank credit on economic growth and the significance of cyclical fluctuations of bank credit. In contrast, a higher market share of loans granted by foreign-owned banks in a cyclical upswing and stock market capitalisation are found to have a proactive effect on growth.
Acknowledgements
The opinions expressed herein are those of the authors and do not reflect those of the associated institutions. We are very grateful to two anonymous reviewers, as well as to Paul Wachtel and Laura Nieri for their very insightful and constructive comments. We would also like to thank the participants of the 2nd International Conference on Finance and Economic Policy (19–20 April 2018), Elena Cubillas and the participants of the 16th INFINITI Conference on International Finance (11–12 June 2018), along with the participants of XXVI Edition of International Rome Conference on Money, Banking and Finance (14–16 December 2017), all of whom helped us develop the early draft of the paper.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1. Banking systems in CESEE countries, in contrast to those in advanced countries, did not invest in toxic financial instruments (e.g. CDO, MBS); moreover, they are less sophisticated and thus more transparent. They were also better capitalised and more liquid in the pre-crisis period. Therefore, their banking systems were more resilient to spillover from the GFC.
2. The rule of law index captures perceptions of the extent to which agents have confidence in and abide by the rules of society, particularly the quality of contract enforcement, property rights and the courts as well as the likelihood of crime and violence. The regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
3. These results are available from the authors upon request. They confirmed our findings on the role of the credit cycle.
4. The Z-score, defined as the number of standard deviations by which bank returns have to fall to exhaust bank equity, is considered a proxy of bank soundness.
5. In and , we provide the estimate of the parameter on the lagged in specification (2).
6. The pre-GFC average of impaired loans to gross loans was higher for domestic banks (9.4%) than for foreign-owned banks (8%). After the GFC, the differences between those two groups of banks persisted (17.4% and 14.8%, respectively).
7. In the case of the loan impairment to total assets ratio, those averages were, respectively, 1.6% and 0.8% in the pre-GFC period, while they were 1.8% for both groups in the post-crisis period.
8. A positive effect of inflation on economic growth contrasts with the general consensus about the adverse effects of inflation on real growth. However, our results are in line with the stream of recent research highlighting a nonlinear relationship between the two variables (Khan & Senhadji, Citation2001); at lower rates of inflation, the relationship is not significant or even positive. Indeed, the estimate of the threshold level for developing countries was 11–12% (Khan & Senhadji, Citation2001), and, in our sample of the CESEE countries, inflation rates ranged from negative to a maximum of 10%, confirming the above explanation.