The global credit boom: Challenges for macroeconomics and policy

Staff Discussion Notes, 2020

Credit booms are a focal point for policymakers and scholars of financial crises. Yet our understanding of how the real sector behaves during booms, and why some booms may go bad, is limited. Despite a large and growing body of literature, most of the work has focused on aggregate economic activity, and relatively little is known about which industries benefit and which suffer during these episodes. This note aims to fill this gap by analyzing disaggregated output and employment data in a large sample of advanced and emerging market economies between 1970 and 2014.

SSRN Electronic Journal, 2018

The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. By making any designation of or reference to a particular territory or geographic area, or by using the term "country" in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.

2015

This paper analyzes the impact of international banking flows on domestic credit booms and examines the drivers of the composition of banking flows by type of borrower: banking sector and non-banking sector. First, using a panel of 80 countries from 1980 to 2012, I find that international bank flows to the banking sector increase the probability of credit booms, while flows to the non-banking sector do not. Second, the paper shows that the composition of these flows is partly driven by the monitoring effort of the international bank lender. Using a partial equilibrium CAPM model, I find that, since monitoring is costly, international banks find it optimal to place more funds on the sector that requires less monitoring. I test this theoretical result and show that countries with mechanisms in place to make their banking sector less likely to fail such as government guarantees, fiscal capacity to execute them and high institutional quality attract more international bank funds to thei...

Open Economies Review, 2016

It has been frequently argued that surges in capital inflows are a major cause of credit booms and banking crises in emerging market economies. This view suggests that there is little role that can be played by domestic policy to break this linkage. This need not be the case. We show that the linkage between surges and booms is not as strong as is often assumed. One problem with most previous studies is that a wide range of measures for both surges and booms has been used with little checking of the robustness of results. We deal with this issue by replicating 14 different measures of capital surges (gross and net) and 5 credit boom proxies from the literature on a sample of 46 countries from 1981-2010. A second difficulty is that some previous studies have not distinguished between the proportions of surges followed by booms and booms preceded by surges. We found substantial differences between these two relationships. While there is a good deal of variation in the individual correlations the vast majority of the calculated probabilities of a surge being followed by a credit boom fall within the range of 4 % to 13 %. Although the proportion of credit booms preceded by surges is higher, the correlations for both directions are much lower than are frequently assumed. While the probabilities of a surge being followed by a credit boom generally increased from the 1980s to the 1990s they fell again in the 2000s, suggesting the possibility that

SSRN Electronic Journal, 2003

The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organisation and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realised. In addition, the structure of management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression. JEL classification codes: E3, N2. 1 We thank Pipat Luengnaruemitchai and Justin Jones for research assistance and Michael Bordo, Alex Field, Charles Goodhart, and Ian McLean for comments. The views expressed are those of the authors and not those of the BIS. We dedicate this paper to the memory of Charles Kindleberger, whose passing coincided with its completion. 2 See for example Bernanke and Gertler (1999) or Tornell and Westerman (2002). 3 See Vila (2000), Borio, Fufine and Lowe (2001), and Borio and Lowe (2002). That this is the right policy conclusion is, of course, not universally agreed. On the controversy over the role of asset prices and credit conditions in the conduct of monetary policy, see Bullard and

Applied Economics Letters, 2015

Credit expansion has been associated with faster economic growth and with a higher occurrence of …nancial crises, a pair of results which seem to contradict each other. This paper advances an explanation for these results by separating credit to the private sector into credit to …rms and credit to households. The empirical analysis shows that credit to …rms is responsible for the positive growth e¤ect, while the higher occurrence of crises is mainly due to credit to households. The events of the last decade, where fast credit expansion led to crises and very little growth, can be understood as a shift in the composition of credit towards its household component. JEL classi…cation: E44, G21.

1999

*A previous version of this paper was prepared for the Second Annual Conference of the Central Bank of Chile \Banking, Financial Integration, and Macroeconomic Stability," Santiago, Chile, 1998. We thank Peter Henry, Alejandra Roizen, Klaus Schmidt-Hebbel and Aaron Tornell for useful conversations, as well as seminar participants at Princeton and the IMF. This paper presents the views of the authors and does not represent positions or views of the Central Bank of Chile. Pierre-Olivier Gourinchas thanks the Central Bank of Chile for its hospitality.

European Economic Review, 2018

Why do advanced economies fall into prolonged periods of economic stagnation, particularly in the aftermath of credit booms? We present a model of persistent aggregate demand shortage based on strong liquidity preferences of households, in which we incorporate financial imperfections to study the interactions between debt, liquidity and asset prices. We show that financially more deregulated economies are more likely to experience persistent stagnation. In the short run, credit booms can mask this structural aggregate demand deficiency. However, the resulting debt overhang permanently depresses spending in the long run since deleveraging becomes self-defeating because of debt deflation. These findings are in line with the macroeconomic developments in Japan during its lost decades and other advanced economies before and during the Great Recession.

Journal of International Money and Finance, 2016

A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.

SSRN Electronic Journal, 2000

One strand of the economics literature addresses financial deepening as a precursor to economic growth. Another views it as a cause of financial crises. We examine historical data for 17 economies from 1870 to 1929 to distinguish episodes of growth induced by financial deepening from crises induced by credit booms. Cross-country panel regressions with five-year averages indicate that deepening episodes, defined as increases of more than thirty percent (and alternatively more than twenty percentage points) in the ratio of M2 to GDP over a ten year period, significantly enhanced the standard finance-growth dynamic, while deepening associated with financial crises sharply hindered it. We then describe some specific episodes of financial deepening in our sample.