Role of Credit in Equity Market Booms and Busts
AbstractWidespread 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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Bibliographic InfoPaper provided by Hong Kong Monetary Authority in its series Working Papers with number 0904.
Length: 23 pages
Date of creation: Feb 2009
Date of revision:
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More information through EDIRC
financial stability; monetary stability; equity price booms and busts; excess credit;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
- NEP-CBA-2009-03-28 (Central Banking)
- NEP-MAC-2009-03-28 (Macroeconomics)
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