Lending, economic growth and nonperforming loans: empirical evidences from the new EU member states Bogdan-Gabriel MOINESCU National Bank of Romania Bucharest Academy of Economic Studies bogdan.moinescu@fin.ase.ro Adrian CODIRLAŞU Romanian Association of Financial Banking Analyst Bucharest Academy of Economic Studies adrian.codirlasu@fin.ase.ro Abstract 1 The study aims to investigate the interaction between credit to private sector and GDP growth in the new EU member states. The analytical framework is based on the financial accelerator theory with feedback effects from the banking book quality, while the empirical component consists of a set of simplified econometric models, built applying panel data regressions using annual data. The central variable is the change in private sector credit flow in percent of GDP, as provisioned in the European Commission’s macroeconomic imbalance procedure. Empirical results show that the swings in credit impulse induced by loose income policy, unfavorable sovereign risk development and euro-zone recession fuel a "W"-shaped dynamic of economic growth in CEE countries. Moreover, econometric findings show that both the persistence of a credit flow weaker than potential growth and excessive financing are associated with high levels of non-performing loans ratio two years later. Moreover, the negative feedback effect deepens recession through the credit supply channel, its elasticity to NPL evolution being slightly greater than one. Macro-prudential policy becomes a major component of economic policy mix in NMS, as containing the volatility of economic activity depends, in a decisive way, on the success of maintaining credit accelerator at around zero, while ensuring a credit flow closely related to potential growth. Nevertheless, the fulfillment of these prudential objectives is conditional on other macroeconomic policies coherence so as to avoid triggering shocks, such as (i) jumps in the sovereign risk premium driven by pro-cyclical developments of the fiscal impulse, and (ii) over-feeding the supply-demand spiral on the credit market amid pro-cyclical income policy, given their undesirable impact on some parameters of the credit – economic growth binomial. Keywords: credit accelerator, economic growth, non-performing loans, sovereign risk, pro- cyclicality JEL Classification: G01, G17, G21, G32, G33 1 This work was supported by a grant of the Romanian National Authority for Scientific Research, CNCS – UEFISCDI, project number PN-II-ID-PCE-2011-3-1054 “UNCERTAINTY, COMPLEXITY AND FINANCIAL STABILITY”, managed by the Romanian-American University.