Rapid Credit Growth: Boon or Boom-Bust?
IMF Working Papers, October 1, 2011
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- Rapid Credit Growth: Boon or Boom-Bust?
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Bibliographic details
- Authors: Selim A Elekdag, Yiqun Wu
- Published: October 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463922627.001
Executive summary and main findings
- Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises.
- The paper presents findings from a comprehensive event study focusing on 99 credit booms.
- Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies.
- Domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances.
- For emerging economies:
- Credit booms are associated with episodes of large capital inflows.
- International interest rates (a proxy for global liquidity) are virtually flat during these periods.
- Therefore, although external factors such as global liquidity conditions matter (and possibly increasingly so over time), domestic factors (especially monetary policy) also appear to be important drivers of real credit growth.
Empirical approach and scope
- Method: Comprehensive event study of credit boom episodes.
- Sample size: 99 credit booms.
- Geographic coverage: Advanced and emerging economies (including emerging Asia referenced in keywords).
- Key variables discussed: real credit growth, domestic policy rates, international interest rates (proxy for global liquidity), capital inflows, macroeconomic and financial imbalances.
Policy-relevant implications
- Monetary policy: Domestic policy rates below trend during the pre-peak phase indicate that loose domestic monetary policy can fuel credit booms and associated imbalances.
- External versus domestic drivers: While global liquidity and external factors matter for credit dynamics in emerging economies, domestic monetary conditions are a significant and direct driver of real credit growth.
- Macroprudential and policy mix considerations: Results imply attention to domestic monetary stances and capital flow management when addressing rapid credit expansion to mitigate boom-bust risks.