Romania in a post-credit crunch world? A cautionary tale from Australia and America

TL;DR

This paper examines the potential impact of the US subprime crisis on Romania by analyzing debt trends and developing a model of credit crunch dynamics in economies with endogenous money creation.

Contribution

It introduces a model of credit crunch in a credit economy with endogenous money, highlighting how lending practices can trigger economic decline.

Findings

Debt data suggests Romania may face similar risks as Australia and the US.

Changes in bank lending practices can lead to economic downturns.

Endogenous money creation plays a key role in credit crunch dynamics.

Abstract

We present data on debt accumulation in Australia and the United States, and tentative data on Romania, to pose the question of whether Romania might experience a credit crunch as a result of the US subprime financial crisis. We develop a model of a credit crunch in a pure credit economy with endogenous money creation, to show how changes in bank lending practices and borrower repayment behaviour can bring about an economic decline.