Working Paper: NBER ID: w18379
Authors: Enrique G. Mendoza; Marco E. Terrones
Abstract: What are the stylized facts that characterize the dynamics of credit booms and the associated fluctuations in macro-economic aggregates? This paper answers this question by applying a method proposed in our earlier work for measuring and identifying credit booms to data for 61 emerging and industrial countries over the 1960-2010 period. We identify 70 credit boom events, half of them in each group of countries. Event analysis shows a systematic relationship between credit booms and a boom-bust cycle in production and absorption, asset prices, real exchange rates, capital inflows, and external deficits. Credit booms are synchronized internationally and show three striking similarities in industrial and emerging economies: (1) credit booms are similar in duration and magnitude, normalized by the cyclical variability of credit; (2) banking crises, currency crises or Sudden Stops often follow credit booms, and they do so at similar frequencies in industrial and emerging economies; and (3) credit booms often follow surges in capital inflows, TFP gains, and financial reforms, and are far more common with managed than flexible exchange rates.
Keywords: credit booms; macroeconomic fluctuations; financial crises; emerging economies; industrial economies
JEL Codes: E32; E44; E51; 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 expansion (F43) |
| credit booms (F65) | rising equity and housing prices (R31) |
| credit booms (F65) | real currency appreciation (F31) |
| credit booms (F65) | widening external deficits (F32) |
| credit booms (F65) | economic contraction (F44) |
| credit booms (F65) | banking crisis (F65) |
| credit booms (F65) | currency crisis (F31) |
| credit booms (F65) | synchronized international dynamics (F02) |
| credit booms (F65) | crises frequency consistency (G01) |
| credit booms (F65) | managed exchange rates (F31) |