However, there are notable differences across the region: the Baltic states (especially Latvia and Estonia) and South-East European countries (especially Croatia and Bulgaria) seem to have approached or even reached the equilibrium by 2004 or 2005, whereas in the case of the Visegrad countries (especially the Czech Republic and Poland) the credit-to-GDP ratio seemed to remain below its estimated equilibrium level at that time. Of course, it might well be that some of the CEE economies have overshot the  1  Kiss, G., Nagy, M., Vonnák, B.: Credit Growth in Central and Eastern Europe: Trend, Cycle or Boom?, MNB Working Paper No. 2006/10, November 2006 and Egert, B., Backé, P., Zumer, T.: Credit Growth in Central and Eastern Europe: New (Over)Shooting Stars?, ECB Working Paper No. 687, October 2006. BIS Review 137/2007  1  equilibrium only recently, but one has to wait for a while until the relevant data become available before this overshooting can be captured in empirical analyses. The general upshot of these papers is that the rapid credit expansion in CEE economies has mainly been fuelled by demand factors: the buoyant economic growth and the ensuing increases in disposable incomes, rising expectations with regard to future income prospects related to EU accession, remarkable decreases in interest rates, and falling or low and stable inflation rates.
Admittedly, depreciation of CEE currencies has hardly been an issue in the recent past; the currencies in the region have either stable exchange rates (when these are pegged) or tend to appreciate (when the exchange rate regime allows it). However, concerns remain that under such conditions, domestic monetary policy cannot  7  Égert, B., Mihaljek, D.: Determinants of House Prices in Central and Eastern Europe, BIS Working Paper No. 236, September 2007. 8  Zajączkowski, S., Żochowski, D.: Housing Loans Growth, Foreign Currency Risk and Supervisory Response: the Polish Case, mimeo, November 2007. 9  Brzoza-Brzezina, M., Chmielewski, T., Niedźwiedziska, J.: Substitution between Domestic and Foreign Currency Loans in Central Europe, mimeo, November 2007. BIS Review 137/2007  3  effectively control the growth of credit due to the substitution effect: monetary tightening at home does not lead to a slowdown of total credit growth, but rather to increased foreign currency indebtedness. The analysis in the paper has identified the existence of this effect in the case of three largest CEE economies. Generally, most papers presented and discussed over the last two days have stressed the necessity of prudential supervision of the banking system in the face of a credit boom. Even though financial deepening and capital inflows bring about long-term benefits that can hardly be overstated, in the short to medium run they can lead to imbalances and distortions that pose a threat to the macroeconomic stability of a country.