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International Capital Flows and Economic Growth in CESEE: A Structural Break in the Great Recession

Željko Bogdan ; Faculty of Economics and Business, University of Zagreb
Milan Deskar Škrbić orcid.org/0000-0002-7611-2071
Velimir Šonje ; Zagreb School of Economics and Management

Abstract

This paper deals with real effects of bank-intermediated international capital flows to 11 CESEE coun-tries 1997-2012. The purpose is to check for structural breaks in the short-run relationship between bank-intermediated capital flows and output growth since 2008. The relationship is investigated in dynamic panel growth regression framework. Results show that there was no systematic relationship between international banks' exposures and countries' growth rates at normal times. The relationship turned negative at times of crisis, implying that international banks did not cause or propagate negative output shocks in the period of great recession. Moreover, banks may have alleviated intensity of nega-tive shocks by resisting reduction of country exposures in line with contracting GDP.
Asset and liability side of local banks' balance sheets are separated by different kinds of capital and liquidity buffers. So, effects of lending in local credit markets on GDP growth should be looked at separately from international component on the liability side of banks’ balance sheets. When interna-tional banks' exposures are replaced by local credit portfolios in panel growth regressions, the results change: (1) there is a positive relationship between credit to households and output growth: moreover, strength of positive relationship is magnified at times of crisis; (2) positive relationship between cor-porate credit and output growth does not change at times of crisis. Thus, crisis-related household sec-tor deleveraging may be much more costly in terms of output loss, than corporate sector deleveraging. Key policy implication is that maintaining the flow of credit to households has higher importance in combating the crisis in the short run than stimulating the flow of credit to non-financial corporations. Also, crisis-related household sector deleveraging may be much more costly in terms of output loss, than corporate sector deleveraging.

Keywords

capital flows; economic growth; CESEE; Great Recession; panel analysis

Hrčak ID:

136628

URI

https://hrcak.srce.hr/136628

Publication date:

23.10.2014.

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