Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?

Brzoza-Brzezina, Michał and Chmielewski, Tomasz and Niedźwiedzińska, Joanna (2007): Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter?

Abstract

In this paper we ask a question about the impact of monetary policy on total bank lending in the presence of a developed market for foreign currency denominated loans and potential substitutability between domestic and foreign currency loans. Our results, based on a panel of three biggest Central European countries (the Czech Republic, Hungary and Poland) confirm the existence of the substitution effect between these loans. Restrictive monetary policy leads to a decrease in domestic currency lending but simultaneously accelerates foreign currency denominated loans. This makes the central bank's job harder with respect to providing both, monetary and financial stability.

• Item Type: MPRA Paper
• Language: English
• Keywords: domestic and foreign currency loans, substitution, monetary policy, financial stability, Central Europe
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Arellano M. and S. Bond (1991), Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, The Review of Economic Studies, Vol. 58, pp. 277-297.

Atanasova C.V. and N. Wilson (2004), Disequilibrium in the UK Corporate Loan Market, Journal of Banking and Finance, Vol. 28, No. 3, March, pp. 595-614.

Backe P. and C. Wójcik (2006), Catching-up and Credit Booms in Central and Eastern European EU Member States and Acceding Countries: An Interpretation within the New Neoclassical Synthesis Framework, CESifo Working Paper No. 1836, October.

Backe, P., B. Egert and T. Zumer (2006), Credit Growth in Central and Eastern Europe: New (Over)Shooting Stars? ECB Working Papers, No. 687, October.

Bernanke, B.S. and A.S. Blinder (1988), Credit, Money and Aggregate Demand, American Economic Review Papers and Proceedings, Vol. 78, pp. 435-9.

Boissay, F., O. Calvo-Gonzalez and T. Koźluk (2005), Is Lending in Central and Eastern Europe Developing too Fast? Paper presented at the conference “Finance and Consumption Workshop: Consumption and Credit in Countries with Developing Credit Markets”, Florence, 16-17 June.

Borio, C. and A. Filardo (2004), Back to the future? Assessing the deflation record, BIS Working Papers, no 152, March.

Borio, C. and A. Filardo (2004), Looking back at the international deflation record, North American Journal of Economics and Finance, December, pp. 287-311.

Brzoza-Brzezina, M. (2005), Lending Booms in the New EU Member States - Will Euro Adoption Matter? European Central Bank Working Paper No. 543.

Calza, A., C. Gartner and J. Sousa (2001), Modelling the demand for loans to the private sector in the Euro area, European Central Bank Working Paper No. 55.

Calza, A., M. Manrique and J. Sousa (2003), Aggregate loans to the Euro area private sector, European Central Bank Working Paper No. 202.

Carpolare, T. and K. B. Grier (2000), Political Regime Change and the Real Interest Rate, Journal of Money, credit and Banking, Vol. 32, No. 3 (August), pp. 320-334.

Czech National Bank (2006), Financial Stability Report.

Clarida, R., J. Gali. and M. Gertler (1999), The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature, December.

Duenwald, C., N. Gueorguiev and A. Schaechter (2005), Too much of a good thing? Credit booms in transition economies: The cases of Bulgaria, Romania and Ukraine, IMF Working Paper, No. 128.

Fischer, B., M. Lenza, H. Pill and L. Reichlin (2006), Money and monetary policy: The ECB experience, Fourth ECB Central Ranking Conference, November.

Gerlach, S. and L. Svensson (2003), Money and inflation in the euro area: a case for monetary indicators?, Journal of Monetary Economics, pp. 1649-72.

Hilbers, P., I. Otker-Robe and C. Pazarbacsiouglu (2006), Going too Fast? Managing rapid credit growth in Central and Eastern Europe, IMF, Finance and Development, 43(1).

Hofmann, B. (2001), The Determinants of Private Sector Credit in Industrialised Countries: Do Property Prices Matter? BIS Working Paper No. 108.

Horvath C., J. Kreko and A. Naszodi (2006), Is there a bank lending channel in Hungary? Evidence form bank panel data, MNB Working Paper No. 7, May.

Hurlin, C. and R. Kierzenkowski (2002), A theoretical and empirical assessment of the bank lending channel and loan market disequilibrium in Poland, Working Paper 22, May 2002, National Bank of Poland, Research Department

Kashyap, A. and J. Stein (1995), The impact of monetary policy on bank balance sheets, Carnegie-Rochester Conference Series on Public Policy, 42, 151-195.

Kashyap, A. and J. Stein (2000), What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?, American Economic Review , 90(3), pp. 407-28.

Kiss, G., M. Nagy and B. Vonnak (2006), Credit Growth in Central and Eastern Europe: Trend, Cycle or Boom?, Paper presented at the conference “Finance and Consumption Workshop: Consumption and Credit in Countries with Developing Credit Markets”, Florence, 16-17 June.

Maddala, G. S. and F. D. Nelson (1974), Maximum Likelihood Methods for Models of Markets in Disequilibrium, Econometrica, Vol. 42, No. 6., November, pp. 1013-1030.

Magyar Nemzeti Bank (2006), Inflation Report (update), August.

Mishkin F. (1996), The Channels of Monetary Transmission: Lessons for Monetary Policy, NBER WP 5464, Cambridge.

National Bank of Poland (2007), Minutes of the MPC decision-making meeting held on 27 June 2007.

Pedroni P. (2000), Fully Modified OLS for Heterogeneous Cointegrated Panels, in: Nonstationary Panels, Panel Cointegration and Dynamic Panels, Elsevier, pp. 93–130.

Rotemberg, J. and M. Woodford (1998), Interest-Rate Rules in an Estimated Sticky Price Model, NBER Working Papers 6618. National Bureau of Economic Research.

Shively, P. A. (2001), Trend-Stationary GNP: Evidence from a New Exact Pointwise Most Powerful Invariant Unit Root Test, Journal of Applied Econometrics, Vol. 16, No. 4 (July/August), pp. 537-551.

Sirtaine S. and I. Skamnelos (2007), Credit Growth in Emerging Europe: A Cause for Stability Concerns?, Policy Research Working Paper, No. 4281, The World Bank, July.

Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.

Wrobel, E. and M. Pawłowska (2002), Monetary Transmission in Poland: Some Evidence on Interest Rate and Credit Channels, National Bank of Poland, Materialy i Studia, No. 24.

Zicchino, L. and I. Love (2006), Financial Development and Dynamic Investment Behaviour: evidence form Panel VAR, The Quarterly Review of Economics and Finance, Vol. 46, pp. 190-210.