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Towards an understanding of credit cycles: do all credit booms cause crises?

Author

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  • R. Barrell

    (Brunel University London, UK)

  • D. Karim

    (Brunel University London, UK)

  • Corrado Macchiarelli

    (London School of Economics and Political Science, UK; The Rimini Centre for Economic Analysis)

Abstract

Macroprudential policy is now based around a countercyclical buffer, relating capital requirements for banks to the degree of excess credit in the economy. We consider the construction of the credit to GDP gap looking at different ways of extracting the cyclical indicator for excess credit. We compare different smoothing mechanisms for the credit gap, and demonstrate that some countries require an AR(2) smoother whilst other do not. We embed these different estimates of the credit gap in Logit models of financial crises, and show that the AR(2) cycle is a much better contributor to their explanation than is the HP filter suggested by the BIS and currently in use in policy making. We show that our results are robust to changes in assumptions, and we make criticisms of current policy settings.

Suggested Citation

  • R. Barrell & D. Karim & Corrado Macchiarelli, 2017. "Towards an understanding of credit cycles: do all credit booms cause crises?," Working Paper series 17-28, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:17-28
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    References listed on IDEAS

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    Cited by:

    1. Ihejirika, Peters. O, 2020. "Does the Credit-to-GDP Gap Predict Financial Crisis in Nigeria?," International Journal of Social and Administrative Sciences, Asian Economic and Social Society, vol. 5(2), pages 109-126, June.
    2. Ray Barrell & Dilruba Karim, 2020. "Bank capital: Excess credit and crisis incidence," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 121-137.
    3. Greg Farrell & Esti Kemp, 2020. "Measuring the Financial Cycle in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 123-144, June.
    4. repec:hal:spmain:info:hdl:2441/71b87sa9s888hpa0qfc4jlo1od is not listed on IDEAS
    5. Abd Samad, Khairunnisa & Mohd Daud, Siti Nurazira & Mohd Dali, Nuradli Ridzwan Shah, 2020. "Early Warning Indicators for Systemic Banking Crises: Household Debt and Property Prices," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 54(1), pages 121-134.

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    More about this item

    Keywords

    credit cycle; financial crisis; banks; macro-prudential policy; filtering;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G00 - Financial Economics - - General - - - General

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