Credit Booms and Macroeconomic Dynamics: Stylized Facts and Lessons for Low-Income Countries
IMF Working Papers, January 22, 2015
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Bibliographic details
- Authors: Marco Arena, Serpil Bouza, Era Dabla-Norris, Kerstin Gerling, Lamin Njie
- Published: January 22, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484356869.001
Summary
- Using a comprehensive database on bank credit, covering 135 developing countries over the period 1960–2011, the paper identifies, documents, and compares the macro-economic dynamics of credit booms across low- and middle-income countries.
- Main high-level conclusion: duration and magnitude of credit booms are similar across country groups, but macroeconomic dynamics differ somewhat in low-income countries.
- Surges in capital inflows are associated with credit booms.
- Credit booms associated with banking crises exhibit distinct macroeconomic dynamics and reflect a potentially large deviation of credit from country fundamentals.
- Policy takeaway: low-income countries should remain mindful of inter-linkages between financial liberalization, increased cross-border banking activities, and rapid credit growth.
Key findings and evidence
- Sample and period:
- Database covers 135 developing countries.
- Analysis period: 1960–2011.
- Comparative stylized facts:
- Duration and magnitude of credit booms: similar across low- and middle-income country groups.
- Macroeconomic dynamics: differ somewhat in low-income countries relative to middle-income countries.
- Capital flows:
- Surges in capital inflows are empirically associated with the occurrence of credit booms.
- Banking crises linkage:
- Credit booms that culminate in banking crises show distinct macroeconomic dynamics.
- Such boom episodes may reflect a potentially large deviation of credit from country fundamentals.
Policy implications and recommendations
- Remain vigilant about the interplay between:
- Financial liberalization;
- Increased cross-border banking activities; and
- Rapid credit growth.
- For low-income countries, monitoring capital inflows is important given their association with credit booms.
- Pay special attention to credit booms that may deviate substantially from fundamentals, as these are more likely to be associated with banking crises and adverse macroeconomic dynamics.
Keywords and topics covered
- Balance of payments, Banking crises, Capital inflows, Credit, Credit booms, Financial crises, Monetary expansion, Monetary policy, Money
- Analysis terms appearing in the paper: analysis of credit boom, banking, boom episode, boom magnitude, characteristics of credit boom, credit growth, credit percapita, credit-to-GDP, emerging market economies, end of the credit boom, Global, growth rate, low-income countries, macroeocnomic dynamics, Monetary expansion, percentage of credit boom, probability of a credit boom, probability of credit boom episode, WP
Source: IMF Working Paper by Marco Arena, Serpil Bouza, Era Dabla-Norris, Kerstin Gerling, and Lamin Njie; January 22, 2015.