Estimating Equilibrium level of public lending of banks in Sweden and in largest foreign markets of Swedish banks

Abstract: This paper studies future opportunities of the largest banks in Sweden regarding expanding their foreign household and non-financial corporation lending to the main foreign markets (Norway, Denmark, Finland) by estimating the long term equilibrium levels of bank lending to GDP in each of the foreign country and estimating the short term shocks to the equilibrium levels in each of the countries by computing impulse response functions. In addition, the paper aims to answer the question regarding what is the equilibrium level of bank lending to GDP in Sweden itself and explores the short term shocks to the Credit/GDP level. In this paper it is assumed that variables influencing the Bank lending/GDP ratio are inflation rate, interest rate and housing prices. The equilibrium levels in each of the countries are modelled by a vector error correction model (VECM), by considering a common set of models and sample sizes for all countries.