Credit Cyclicality in Chile: A Cross-Country Analysis

IMF Working Papers, March 1, 2008

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This paper analyzes the determinants of credit cyclicality.
It constructs a financial development index and studies whether it affects the amplitude of impulse responses to shocks to output, terms of trade, global liquidity, and global risk appetite.
The paper uses both country-specific VARs for cross-country analyses and panel VARs to compare impulse responses between various country groupings.
The study finds evidence that financial development—especially stronger creditor rights—can mitigate credit cyclicality, given that the response of credit to output or terms of trade shocks is stronger in countries with weaker financial systems.

Construction of a financial development index to capture cross-country differences in financial systems.
Use of country-specific VARs for cross-country analyses.
Use of panel VARs to compare impulse responses across country groupings.
Analysis of impulse responses to shocks to:
- output
- terms of trade
- global liquidity
- global risk appetite

Financial development affects the amplitude of credit responses to macroeconomic shocks.
Stronger creditor rights are particularly associated with mitigation of credit cyclicality.
The response of credit to output or terms of trade shocks is stronger in countries with weaker financial systems.

Strengthening financial development, and in particular creditor rights, can reduce the amplitude of credit cyclicality in response to shocks.
Policies aimed at improving the depth and resilience of financial systems may dampen credit responses to output and terms of trade shocks.