Lillian Cheung (Research Department, Hong Kong Monetary Authority) Chi-Sang Tam (Research Department, Hong Kong Monetary Authority)
Abstract
Widespread financial distress typically arises from the unwinding of financial imbalances that build up disguised by benign economic conditions. This paper studies whether credit is a pertinent indicator of future equity price booms, and thus provides a signal for potential financial instability. Our analysis shows that excess credit does increase the probability of an equity price boom ahead. We argue that a policy response worthy of consideration would be a strengthening of the system-wide focus of the prudential framework coupled with monetary policy rules that take into account occasional development of financial imbalances to prevent potentially significant financial strains from developing. To this end, greater co-operation between monetary and prudential authorities is important, not just in managing crises, but also in preventing their emergence.
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Paper provided by Hong Kong Monetary Authority in its series Working Papers with number
0904.
Find related papers by JEL classification: E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies G01 - Financial Economics - - General - - - Financial Crises
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Takatoshi Ito, 2000.
"Capital Flows in Asia,"
NBER Chapters,
in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 255-298
National Bureau of Economic Research, Inc.
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