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Energy Prices, Interest Rates, and Domestic Credit in the 11 Central European EU Member States

Scott W. Hegerty, Ph.D.

Professor of Economics, NEIU

World Economy Research Institute

October 24, 2024

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Main idea: Credit expansions

  • Formed a “bubble” in CEE before it burst in 2008�(Capital inflows, “fast credit,” etc.)
  • Measures to avoid the next one

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  • Effects on health: Overall consumption, debt, ability to cover emergencies…

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Credit expansions

  • Macroeconomic causes (income, etc.)

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Here: energy prices, interest rates

  • This study: Uses time-series methods for 11 CEE countries
  • Quarterly data (1995-2021)
  • Vector Autoregressions

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Key variables: Theory

  • Interest rate reductions fuel credit growth
  • More ambiguous: Energy prices�(Higher: resort to borrowing OR save in the face of a shock)�
  • Also important: Which effect is larger? Over what time horizon? �

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Some previous studies

  • Rocha et al. (2022), Brazil
  • He and Le (2022), Korea
  • Gozgor (2014): Credit levels, panel includes some CEE�🡪 Interest-rate differentials significant
  • Hegerty (2024): Long-run (cointegration), commodity-price index�(not just energy)�🡪 r differentials significant in 2/11 CEE countries (PL, SK)�🡪 Commodity prices significant in 3/11�Nonlinear effects as well

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This study:

  • Conducts a macroeconomic analysis
  • Measures the effects of shocks on growth in domestic credit
  • Orthogonalized VAR analysis: Impulse-Response Functions and Forecast Error Variance Decompositions�(6/12 quarter horizon; AIC-minimizing lags)
  • Variables:�Volatility, P(e)*, REER*, Current Account (/GDP), r-differential (vs. US), Inflation, GDP growth, credit growth (* = log changes)

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Imports as % of Energy use (2010-14 avg)

Source: World Bank

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Country Name

Country Code

Avg2010-14

Lithuania

LTU

77.6

Slovak Republic

SVK

61.8

Hungary

HUN

55.8

Latvia

LVA

50.1

Croatia

HRV

47.9

Slovenia

SVN

47.3

Bulgaria

BGR

37.2

Poland

POL

29.7

Czechia

CZE

26.8

Romania

ROU

20.5

Estonia

EST

8.2

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The data

International Financial Statistics�Bank for International Settlements (via FRED)

Quarterly, 1995-2021

All tested for stationarity

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Spikes and declines over time

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Domestic Credit and Credit Growth

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Interest-rate Differentials (vs. US)

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Current Account, shares of GDP

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CPI and Inflation

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Real Effective Exchange Rates

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GDP and Growth

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Results

  • Impulse-Response Functions: positive shock to energy prices reduces credit growth in Romania, Poland, Lithuania , Croatia a little�🡪 Reduces CRG in Estonia and Slovakia more

(Higher energy prices lead to saving, not borrowing)

(Depends on internal sources vs. imports?)

  • Increase in interest-rate differential increases credit growth in Bulgaria lower in Slovakia and Estonia

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Bulgaria Romania

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Poland Hungary

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Czechia Slovakia

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Croatia Slovenia

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Estonia Latvia

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Lithuania

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FEVDs: Shocks to Variables, response by CRG

Latvia:

rdiff ≈ 1.5%

ca_g ≈ 14%

dlpc ≈ 7%

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FEVDs

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FEVDs: Energy Prices vs. Interest-Rate Differentials

Average FEVD over horizons 1-12

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FEVDs vs. % Imported Energy

Average FEVD over horizons 1-12

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Conclusions

  • Poland (and Croatia): Highly affected by energy prices
  • Slovakia and Estonia: Impacted by interest rates more

(both large, but unequal)

🡪 Share of energy imports?

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  • Country-specific factors? Exchange-rate regime? Both?�

Future research would isolate why some countries affected but not others

(Additional approaches, micro-level data)

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Thank you!

  • S-Hegerty@neiu.edu