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Towards an understanding of credit cycles: do all credit booms cause crises?

Author

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  • R. Barrell

    (Brunel University London, UK)

  • D. Karim

    (Brunel University London, UK)

  • Corrado Macchiarelli

    (London School of Economics and Political Science, UK; The Rimini Centre for Economic Analysis)

Abstract

Macroprudential policy is now based around a countercyclical buffer, relating capital requirements for banks to the degree of excess credit in the economy. We consider the construction of the credit to GDP gap looking at different ways of extracting the cyclical indicator for excess credit. We compare different smoothing mechanisms for the credit gap, and demonstrate that some countries require an AR(2) smoother whilst other do not. We embed these different estimates of the credit gap in Logit models of financial crises, and show that the AR(2) cycle is a much better contributor to their explanation than is the HP filter suggested by the BIS and currently in use in policy making. We show that our results are robust to changes in assumptions, and we make criticisms of current policy settings.

Suggested Citation

  • R. Barrell & D. Karim & Corrado Macchiarelli, 2017. "Towards an understanding of credit cycles: do all credit booms cause crises?," Working Paper series 17-28, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:17-28
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    References listed on IDEAS

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    Cited by:

    1. Ihejirika, Peters. O, 2020. "Does the Credit-to-GDP Gap Predict Financial Crisis in Nigeria?," International Journal of Social and Administrative Sciences, Asian Economic and Social Society, vol. 5(2), pages 109-126, June.
    2. Greg Farrell & Esti Kemp, 2020. "Measuring the Financial Cycle in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 123-144, June.
    3. Ray Barrell & Karim Dilruba, 2020. "Bank capital: excess credit and crisis incidence," Sciences Po publications info:hdl:2441/71b87sa9s88, Sciences Po.

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    Keywords

    credit cycle; financial crisis; banks; macro-prudential policy; filtering;
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