Working Paper: CEPR ID: DP2811
Authors: Pierre-Olivier Gourinchas; Rodrigo Valdés; Oscar Landerretche
Abstract: Recent theories on the origins of crises put lending booms at the root of financial collapses. Yet lending booms may be a natural consequence of economic development and fluctuations. So, are lending booms dangerous? In this Paper, we investigate this question empirically using a broad sample of lending boom episodes over 40 years, with a special eye on Latin America. Our results indicate that: (1) lending booms are often associated with (i) a domestic investment boom, (ii) an increase in domestic interest rates, (iii) a worsening of the current account, (iv) a decline in reserves, (v) a real appreciation, and (vi) a decline in output growth; (2) lending booms typically do not substantially increase the vulnerability of the banking sector or the balance of payments. On comparing Latin America and the rest of the world, we find that Latin American lending booms make the economy considerably more volatile and vulnerable to financial and balance-of-payment crises than is the case in other regions.
Keywords: balance-of-payments crises; banking crisis; credit boom; lending boom; macroeconomic performance; Latin America
JEL Codes: E44; E51; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lending booms (F65) | domestic investment boom (E22) |
| lending booms (F65) | increase in domestic interest rates (E43) |
| lending booms (F65) | worsening of current account (F32) |
| lending booms (F65) | decline in reserves (Q31) |
| lending booms (F65) | real appreciation (D46) |
| lending booms (F65) | decline in output growth (O49) |
| lending booms (F65) | banking crises (G01) |
| lending booms (F65) | balance-of-payments crises (F32) |
| lending booms (F65) | fluctuations in output (E32) |
| lending booms (F65) | fluctuations in interest rates (E43) |