{
  "title": "Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability",
  "publication": "IMF Working Papers, August 20, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2021/08/20/loose-financial-conditions-rising-leverage-and-risks-to-macro-financial-stability-464336",
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  "summary": "After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, Yizhi Xu\n- Date: August 20, 2021\n- Short description: After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. The paper investigates empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies."
    },
    {
      "heading": "Key findings",
      "content": "- Loose financial conditions contribute to leverage buildups.\n- There is an intertemporal tradeoff:\n  - Financial stability risk is lessened in the near term.\n  - Financial stability risk is exacerbated in the medium term.\n- The intertemporal tradeoff is amplified under certain conditions:\n  - During credit booms.\n  - When debt service burdens are particularly high.\n  - When the share of foreign currency debt is high in emerging markets.\n- Selected macroprudential tools can arrest leverage buildups and mitigate the intertemporal tradeoff."
    },
    {
      "heading": "Amplifiers and vulnerabilities",
      "content": "- Credit booms amplify the tradeoff between near-term easing of stability risk and medium-term exacerbation.\n- High debt service burdens increase medium-term macro-financial stability risk.\n- A high share of foreign currency debt in emerging markets raises vulnerability and amplifies the tradeoff."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Recognize the intertemporal nature of loose financial conditions: near-term stability gains may mask medium-term risks.\n- Use selected macroprudential tools proactively to:\n  - Arrest leverage buildups.\n  - Mitigate the intertemporal tradeoff between near-term and medium-term financial stability.\n- Pay special attention to episodes of credit booms, elevated debt service burdens, and high shares of foreign currency debt in emerging markets when designing macroprudential responses.\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/2021/08/20/loose-financial-conditions-rising-leverage-and-risks-to-macro-financial-stability-464336"
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    "Authors: Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, Yizhi Xu",
    "Published: August 20, 2021",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513591483.001",
    "Authors: Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, Yizhi Xu",
    "Date: August 20, 2021",
    "Short description: After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. The paper investigates empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies.",
    "Loose financial conditions contribute to leverage buildups.",
    "There is an intertemporal tradeoff:",
    "The intertemporal tradeoff is amplified under certain conditions:",
    "Selected macroprudential tools can arrest leverage buildups and mitigate the intertemporal tradeoff.",
    "Credit booms amplify the tradeoff between near-term easing of stability risk and medium-term exacerbation.",
    "High debt service burdens increase medium-term macro-financial stability risk.",
    "A high share of foreign currency debt in emerging markets raises vulnerability and amplifies the tradeoff.",
    "Recognize the intertemporal nature of loose financial conditions: near-term stability gains may mask medium-term risks.",
    "Use selected macroprudential tools proactively to:",
    "Pay special attention to episodes of credit booms, elevated debt service burdens, and high shares of foreign currency debt in emerging markets when designing macroprudential responses.",
    "**Working Paper**"
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