Working Paper: NBER ID: w14049
Authors: Enrique G. Mendoza; Marco E. Terrones
Abstract: This paper proposes a methodology for measuring credit booms and uses it to identify credit booms in emerging and industrial economies over the past four decades. In addition, we use event study methods to identify the key empirical regularities of credit booms in macroeconomic aggregates and micro-level data. Macro data show a systematic relationship between credit booms and economic expansions, rising asset prices, real appreciations, widening external deficits and managed exchange rates. Micro data show a strong association between credit booms and firm-level measures of leverage, firm values, and external financing, and bank-level indicators of banking fragility. Credit booms in industrial and emerging economies show three major differences: (1) credit booms and the macro and micro fluctuations associated with them are larger in emerging economies, particularly in the nontradables sector; (2) not all credit booms end in financial crises, but most emerging markets crises were associated with credit booms; and (3) credit booms in emerging economies are often preceded by large capital inflows but not by financial reforms or productivity gains.
Keywords: credit booms; macroeconomic aggregates; micro data; emerging economies; industrial economies
JEL Codes: E32; E44; E51; F3; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit booms (F65) | economic expansions (E32) |
| credit booms (F65) | rising asset prices (G19) |
| credit booms (F65) | real appreciations (Y60) |
| credit booms (F65) | widening external deficits (F32) |
| credit booms (F65) | firm-level measures of leverage (G32) |
| credit booms (F65) | firm values (G32) |
| credit booms (F65) | external financing (G32) |
| credit booms (F65) | banking fragility (F65) |
| credit booms in emerging economies (F65) | larger fluctuations in macro aggregates (E39) |
| credit booms in emerging economies (F65) | larger fluctuations in micro indicators (E32) |
| credit booms in emerging economies (F65) | pronounced fluctuations in nontradables sector (E39) |
| large capital inflows (F32) | credit booms in emerging economies (F65) |
| productivity gains or financial reforms (O49) | credit booms in industrial countries (F65) |
| exchange rate regimes (F33) | credit booms (F65) |