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An Anatomy of Credit Booms and their Demise

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  • Enrique Mendoza
  • Marco 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 industrialized 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 between industrialized 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 industrialized 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.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 670.

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Date of creation: Jul 2012
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Handle: RePEc:chb:bcchwp:670

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
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  12. Enrique G. Mendoza & Marco E. Terrones, 2008. "An anatomy of credit booms: evidence from macro aggregates and micro data," International Finance Discussion Papers 936, Board of Governors of the Federal Reserve System (U.S.).
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  14. Boz, Emine & Mendoza, Enrique G., 2014. "Financial innovation, the discovery of risk, and the U.S. credit crisis," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 1-22.
  15. Robert J. Barro & Jong-Wha Lee, 2010. "A New Data Set of Educational Attainment in the World, 1950–2010," NBER Working Papers 15902, National Bureau of Economic Research, Inc.
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  17. Daniel Ottens & Edwin Lambregts & Steven Poelhekke, 2005. "Credit Booms in Emerging Market Economies: A Recipe for Banking Crises?," DNB Working Papers 046, Netherlands Central Bank, Research Department.
  18. Marco Terrones & Enrique G. Mendoza, 2008. "An Anatomy of Credit Booms," IMF Working Papers 08/226, International Monetary Fund.
  19. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
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