{
  "title": "The Riskiness of Credit Allocation and Financial Stability",
  "publication": "IMF Working Papers, September 27, 2019",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2019/09/27/the-riskiness-of-credit-allocation-and-financial-stability-48670",
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  "summary": "We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes.",
  "sections": [
    {
      "heading": "Main empirical findings",
      "content": "- Study uses firm-level data for 55 countries over 1991-2016.\n- The riskiness of credit allocation, captured by Greenwood and Hanson (2013)’s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead.\n- The riskiness of credit allocation functions as:\n  - a measure of corporate vulnerability, and\n  - a measure of investor sentiment.\n- Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process."
    },
    {
      "heading": "Data, scope, and methodology indicators",
      "content": "- Data: firm-level coverage across 55 countries.\n- Sample period: 1991-2016.\n- Risk measure: Greenwood and Hanson (2013)’s ISS indicator.\n- Forecast horizon with predictive power: two to three years ahead."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Monitoring the ISS indicator can provide early warning signals for downside GDP risks and systemic banking crises within a two- to three-year window.\n- The dual interpretation of the riskiness measure (corporate vulnerability and investor sentiment) implies policy responses should address both balance-sheet exposures and market-risk-taking incentives.\n- The documented misprediction by economic forecasters indicates a need to reassess forecasting models and belief formation mechanisms used for macro-financial risk assessment.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2019/09/27/the-riskiness-of-credit-allocation-and-financial-stability-48670"
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    "Authors: Luis Brandao Marques, Qianying Chen, Claudio Raddatz, Jerome Vandenbussche, Peichu Xie",
    "Published: September 27, 2019",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513513775.001",
    "Study uses firm-level data for 55 countries over 1991-2016.",
    "The riskiness of credit allocation, captured by Greenwood and Hanson (2013)’s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead.",
    "The riskiness of credit allocation functions as:",
    "Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.",
    "Data: firm-level coverage across 55 countries.",
    "Sample period: 1991-2016.",
    "Risk measure: Greenwood and Hanson (2013)’s ISS indicator.",
    "Forecast horizon with predictive power: two to three years ahead.",
    "Monitoring the ISS indicator can provide early warning signals for downside GDP risks and systemic banking crises within a two- to three-year window.",
    "The dual interpretation of the riskiness measure (corporate vulnerability and investor sentiment) implies policy responses should address both balance-sheet exposures and market-risk-taking incentives.",
    "The documented misprediction by economic forecasters indicates a need to reassess forecasting models and belief formation mechanisms used for macro-financial risk assessment.",
    "**Working Paper**"
  ],
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