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Credit Booms, Banking Crises, and the Current Account

Author

Listed:
  • Scott Davis

    (Hong Kong Institute for Monetary Research and Federal Reserve Bank of Dallas)

  • Adrienne Mack

    (Federal Reserve Bank of Dallas)

  • Wesley Phoa

    (The Capital Group Companies)

  • Anne Vandenabeele

    (The Capital Group Companies)

Abstract

A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large.

Suggested Citation

  • Scott Davis & Adrienne Mack & Wesley Phoa & Anne Vandenabeele, 2014. "Credit Booms, Banking Crises, and the Current Account," Working Papers 292014, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:292014
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    More about this item

    Keywords

    Banking Crises; Credit Booms; Current Account;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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