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What should we do about (Macro) Pru? Macro Prudential Policy and Credit

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  • Ray Barrell
  • Dilruba Karim

Abstract

Credit growth is widely used as an indicator of potential financial stress, and it plays a role in the new Basel III framework. However, it is not clear how good an indicator it is in markets that have been financially liberalised. We take a sample of 14 OECD countries and 14 Latin American and East Asian countries and investigate early warning systems for crises in the post Bretton Woods period. We show that there is a limited role for credit in an early warning system, and hence little reason for the Basel III structure. We argue that the choice of model for predicting crises depends upon both statistical criteria and on the use to which the model is to be put.

Suggested Citation

  • Ray Barrell & Dilruba Karim, 2012. "What should we do about (Macro) Pru? Macro Prudential Policy and Credit," FMG Special Papers sp217, Financial Markets Group.
  • Handle: RePEc:fmg:fmgsps:sp217
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP217.pdf
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    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    4. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
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