Do bank lending practices amplify or stabilise macroeconomic fluctuations? Evidence from emerging Europe before and after financial crises

Abstract

The global financial crisis of 2007–2009 exposed the vulnerability of bank-dependent emerging economies, where procyclical lending amplifies output fluctuations and heightens GDP volatility, with adverse effects on investment, employment, and household welfare. This study investigates the impact of bank lending practices, using credit-to-GDP ratios, foreign bank shares, and macroprudential policy indices (MPIs), on GDP volatility of 14 emerging economies in Central, Eastern, and Southeastern Europe from 2000 to 2024. Using an unbalanced panel of 326 observations, fixed-effects and dynamic system GMM estimations analyse GDP volatility as a function of critical lending variables, while controlling for inflation, public debt, and trade openness. Robustness checks encompass subsample analyses (EU versus non-EU), lagged specifications, and instrumental-variable estimations. The findings demonstrate that a 1% increase in credit-to-GDP elevates volatility by 0.102% (p < 0.01), validating procyclical amplification. More stringent macroprudential policies enhance short-term volatility, particularly in non-EU nations (4.438 vs 2.971; p < 0.01), indicating transitional adjustment effects. Foreign bank shares show delayed amplification, while inflation emerges as a consistent destabilizer. System GMM confirms the persistence of GDP volatility. Overall, bank lending plays a dual role, intensifying boom-bust cycles but supporting stabilisation when embedded within countercyclical macroprudential frameworks and credible inflation targeting. First published online 21 September 2026