Consumer credit in an era of financial liberalization: an overreaction to repressed demand?

In this article, we empirically analyse the factors which determined consumer credit in Greece in the period before and after the financial liberalization, while accounting for significant changes in structure due to the lifting of credit restrictions and the subsequent impressive boom of consumer loans. We use multivariate cointegration techniques to estimate a vector error correction model (VECM) and identify separate demand and supply relationships for consumer loans. We introduce demand and supply-related shifts in parameters through the inclusion of appropriate dummy variables and trends in the long-run relationships. We partly deviate from the typical Johansen procedure and estimate the model in two steps. We find that the theoretical exclusion and coefficient-size restrictions on the demand and supply cointegrating vectors are valid. Our results are consistent with the operation of a bank lending channel in Greece. We also find that the supply side was mostly responsible for the acceleration of consumer loan growth following credit liberalization.