Credit Flow, Output Gap and Inflation: Nominal Convergence Challenges for the EU New Member States
average inflation, credit accelerator, output gap, nominal convergence, panel regressions, emerging economies
Complementary to research on the importance of real convergence for a sustainable euro adopting process, this study analyzes the complexity of the mechanism by which credit growth may become a threat to meeting the inflation rate criterion. The added value of this approach consists of two elements. First, the analysis provides a quantitative mechanism for assessing the fundamental dependence of the output gap on credit development in the economy, econometric results of this study showing that about 15 percent of the credit flow is reflected in the deviation of economic growth from its potential level. Secondly, the study shows that macroprudential policy can contribute to meeting the price stability criterion, especially given that monetary policy instruments have limited effectiveness in countering excessive lending, econometric results showing that about 15 percent of the output gap changes into inflation in the new EU Member States. Thus, even if there are no financial stability indicators among the Maastricht criteria, at least the credit growth represents a macroprudential area with important implications on nominal convergence.