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The Relationship Between Credit and Business Cycles in Central America and the Dominican Republic

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Abstract

This study provides evidence of the relationship between credit and real activity in Central America and the Dominican Republic. We address the empirics of the link between credit and real activity for the case of a group of developing countries with limited financial markets where bank credit is the main source of external finance for the private sector. We compile information of credit to the private sector and the aggregate economic activity for Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua and the DR. The data is analyzed using simple statistical tools (Granger causality tests and spectral analysis) to identify stylized facts on the credit-activity relationship. We find a positive relationship between credit and real activity in frequencies associated to business cycles for all countries. The credit - economic relationship in cycles lasting 10 or more years seems relevant in Costa Rica and the DR. There is evidence suggesting that credit precedes economic activity at business cycles frequencies in Costa Rica, El Salvador, Honduras, Nicaragua and the DR. Excluding Nicaragua, this pattern is observed also in cycles over 8 years for mentioned economies. In case of Guatemala there is no evidence of statistical precedence of credit to economic activity.

Suggested Citation

  • Ramirez, Francisco, 2013. "The Relationship Between Credit and Business Cycles in Central America and the Dominican Republic," MPRA Paper 50332, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50332
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    File URL: https://mpra.ub.uni-muenchen.de/50332/1/The_Relationship_Between_Credit_and_Business_Cycles.pdf
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    References listed on IDEAS

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    1. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    2. José Eduardo Gómez & Jair Ojeda Joya & Fernando Tenjo Galarza & Héctor Manuel Zárate Solano, 2013. "The Interdependence between Credit and Real Business Cycles in Latin American Economies," BORRADORES DE ECONOMIA 010833, BANCO DE LA REPÚBLICA.
    3. Chen, Xiaoshan & Kontonikas, Alexandros & Montagnoli, Alberto, 2012. "Asset prices, credit and the business cycle," Economics Letters, Elsevier, vol. 117(3), pages 857-861.
    4. 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.
    5. Breitung, Jorg & Candelon, Bertrand, 2006. "Testing for short- and long-run causality: A frequency-domain approach," Journal of Econometrics, Elsevier, vol. 132(2), pages 363-378, June.
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    More about this item

    Keywords

    Credit; Business Cycles; Spectral Analysis; Granger Causality;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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