Title: Equilibrium credit growth in the euro area: A non-linear model approach
Authors: Thomas Zoerner - Vienna University of Economics and Business (Austria) [presenting]
Abstract: A non-linear macroeconometric model is proposed to estimate equilibrium credit growth rates in the Euro Area. A threshold vector error correction model (TVECM) that postulates credit growth fluctuation around some long-run equilibrium value determined by a set of macroeconomic fundamentals. The deviation of credit growth from its fundamental value serves as a threshold variable that determines the transition between three regimes. Our modelling approach allows for estimation of the equilibrium credit growth rate and, in addition, provides insights on whether credit markets appear to be far from their equilibrium values. A flexible Bayesian approach permits fully probabilistic inference and provides regime probabilities that the Euro Area credit market is over or undervalued at a given point in time. Moreover, we investigate the impact of monetary policy on credit growth and its equilibrium value by means of structural impulse response analysis. The results suggest that monetary policy exerts a powerful impact on the wider macroeconomy and is capable of driving credit growth back towards its fair value implied by fundamentals.