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The determinants of private sector credit in industrialised countries: do property prices matter?

  • Boris Hofmann

    (Deutsche Bundesbank)

Episodes of boom and bust in credit markets have often coincided with cycles in economic activity and property markets. The coincidence of these cycles has already been widely documented in the literature, but few studies address the issue in a formal way. In this study we analyse the determinants of credit to the private non-bank sector in 16 industrialised countries since 1980 based on a cointegrating VAR. Cointegration tests suggest that the long-run development of credit cannot be explained by standard credit demand factors. But once real property prices, measured as a weighted average of real residential and real commercial property prices, are added to the system, we are able to identify long-run relationships linking real credit positively to real GDP and real property prices and negatively to the real interest rate. These long-run relationships may be interpreted as long-run extended credit demand relationships, but we may also capture effects on credit supply. Impulse response analysis based on a standard Cholesky decomposition reveals that there is significant two-way dynamic interaction between bank credit and property prices. We also find that innovations to the short-term real interest rate have a strong and significant negative effect on bank credit, GDP and property prices.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 108.

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Length: 39 pages
Date of creation: Dec 2001
Date of revision:
Handle: RePEc:bis:biswps:108
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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Case Karl E. & Quigley John M. & Shiller Robert J., 2005. "Comparing Wealth Effects: The Stock Market versus the Housing Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-34, May.
  3. Calza, Alessandro & Gartner, Christine & Sousa, João, 2001. "Modelling the demand for loans to the private sector in the euro area," Working Paper Series 0055, European Central Bank.
  4. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
  5. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
  6. Burkhard Drees & Ceyla Pazarbasioglu, 1995. "The Nordic Banking Crises; Pitfalls in Financial Liberalization?," IMF Working Papers 95/61, International Monetary Fund.
  7. Fase, M. M. G., 1995. "The demand for commercial bank loans and the lending rate," European Economic Review, Elsevier, vol. 39(1), pages 99-115, January.
  8. 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.
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