Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic

Author/Editor:

Valentina Flamini ; Pierluigi Bologna ; Fabio Di Vittorio ; Rasool Zandvakil

Publication Date:

February 22, 2019

Electronic Access:

Download PDF. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.

Series:

Working Paper No. 19/39

Subject:

English

Publication Date:

February 22, 2019

ISBN/ISSN:

9781484397992/1018-5941

Stock No:

WPIEA2019039

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

28

Please address any questions about this title to publications@imf.org