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Financial Cycles and Bankruptcies in the Nordic Countries

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  • Hansen, Jan

    ()
    (Monetary Policy Department, Central Bank of Sweden)

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    Abstract

    This paper studies the relationship between macroeconomic imbalances and bankruptcies in the Nordic countries. Finland, Sweden, Norway and Denmark liberalised their financial markets during the 1980s and experienced the consecutive emergence of a financial cycle, followed by severe banking crises. Cointegration analysis and Granger causality tests suggest that the joint path of credit, house prices and possibly investment in construction relative to GDP creates macroeconomic imbalances and has high predictive power for bankruptcies. House prices appear to be most important. Several empirical results appear to be similar for Sweden, Finland and Norway, while patterns for Denmark often differ. The estimations indicate that macroeconomic imbalances were small at the end of 2001 in all four countries.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 149.

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    Length: 36 pages
    Date of creation: 01 Aug 2003
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0149

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    Keywords: Macroeconomic imbalances; financial distress; VAR model; cointegration;

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    References

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    3. Burkhard Drees & Ceyla Pazarbasioglu, 1998. "The Nordic Banking Crisis," IMF Occasional Papers 161, International Monetary Fund.
    4. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    5. Guttentag, Jack & Herring, Richard, 1984. " Credit Rationing and Financial Disorder," Journal of Finance, American Finance Association, vol. 39(5), pages 1359-82, December.
    6. Ellen R. McGrattan & Edward C. Prescott, 2001. "Is the Stock Market Overvalued?," NBER Working Papers 8077, National Bureau of Economic Research, Inc.
    7. repec:fth:bfdipa:6/2001 is not listed on IDEAS
    8. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland.
    9. Bergman, U. Michael & Hansen, Jan, 2002. "Financial Instability and Monetary Policy: The Swedish Evidence," Working Paper Series 137, Sveriges Riksbank (Central Bank of Sweden).
    10. Herring, Richard J, 1999. "Credit Risk and Financial Instability," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 63-79, Autumn.
    11. Allen, Franklin & Gale, Douglas, 1999. "Bubbles, Crises, and Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 9-18, Autumn.
    12. Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312.
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    Cited by:
    1. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA.
    2. Caterina Mendicino, 2005. "Credit Market Development, Asset Prices and Business Cycle," Computing in Economics and Finance 2005 120, Society for Computational Economics.
    3. Bouvatier, Vincent & López-Villavicencio, Antonia & Mignon, Valérie, 2014. "Short-run dynamics in bank credit: Assessing nonlinearities in cyclicality," Economic Modelling, Elsevier, vol. 37(C), pages 127-136.
    4. Mejra Festić, 2006. "Procyclicality of Financial and Real Sector in Transition Economies," Prague Economic Papers, University of Economics, Prague, vol. 2006(4), pages 315-349.
    5. Goetz von Peter, 2004. "Asset prices and banking distress: a macroeconomic approach," BIS Working Papers 167, Bank for International Settlements.
    6. Pesola , Jarmo, 2005. "Banking fragility and distress: An econometric study of macroeconomic determinants," Research Discussion Papers 13/2005, Bank of Finland.

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