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Equilibrium Credit: The Reference Point for Macroprudential Supervisors

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  • Buncic, Daniel

    ()

  • Martin Melecky

    ()

Abstract

Equilibrium credit is an important concept as it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. The two stages allow us to study changes in the demand for credit due to varying levels of economic, financial and institutional development of a country. Using a panel of high- and middle-income countries over the period 1980-2010, we provide empirical evidence that the credit-to-GDP ratio is inappropriate to measure equilibrium credit. The reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development. The main drivers of this heterogeneity are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and experience of a financial crisis. Also, countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared to other regions of the world.

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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1301.

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Length: 53 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:01

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Keywords: Equilibrium Credit; Macroprudential Supervision; Demand for Credit; Time-Series Panel Data; High- and Middle Income Countries;

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Cited by:
  1. Beck, Thorsten & Feyen, Erik, 2013. "Benchmarking financial systems : introducing the financial possibility frontier," Policy Research Working Paper Series 6615, The World Bank.
  2. Brown, Martin, 2013. "The transmission of banking crises to households : lessons from the 2008-2011 crises in the ECA region," Policy Research Working Paper Series 6528, The World Bank.
  3. Maimbo, Samuel Munzele & Melecky, Martin, 2014. "Financial sector policy in practice : benchmarking financial sector strategies around the world," Policy Research Working Paper Series 6746, The World Bank.
  4. Han, Rui & Melecky, Martin, 2013. "Financial inclusion for financial stability : access to bank deposits and the growth of deposits in the Global Financial Crisis," Policy Research Working Paper Series 6577, The World Bank.
  5. Beck, Thorsten & De Jonghe, Olivier, 2013. "Lending concentration, bank performance and systemic risk : exploring cross-country variation," Policy Research Working Paper Series 6604, The World Bank.
  6. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.

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