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Equilibrium Credit: The Reference Point for Macroprudential Supervisors

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  • Buncic, Daniel

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  • Martin Melecky

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Abstract

Equilibrium credit is an important concept as it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. The two stages allow us to study changes in the demand for credit due to varying levels of economic, financial and institutional development of a country. Using a panel of high- and middle-income countries over the period 1980-2010, we provide empirical evidence that the credit-to-GDP ratio is inappropriate to measure equilibrium credit. The reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development. The main drivers of this heterogeneity are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and experience of a financial crisis. Also, countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared to other regions of the world.

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  • Buncic, Daniel & Martin Melecky, 2013. "Equilibrium Credit: The Reference Point for Macroprudential Supervisors," Economics Working Paper Series 1301, University of St. Gallen, School of Economics and Political Science, revised Feb 2014.
  • Handle: RePEc:usg:econwp:2013:01
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    Cited by:

    1. Buncic, Daniel & Gisler, Katja I.M., 2016. "Global equity market volatility spillovers: A broader role for the United States," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1317-1339.
    2. repec:eee:ecmode:v:64:y:2017:i:c:p:153-171 is not listed on IDEAS
    3. Buncic, Daniel & Piras, Gion Donat, 2016. "Heterogeneous agents, the financial crisis and exchange rate predictability," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 313-359.
    4. Beck, Thorsten & Feyen, Erik, 2013. "Benchmarking financial systems : introducing the financial possibility frontier," Policy Research Working Paper Series 6615, The World Bank.
    5. Aleš Melecký & Martin Melecký & Monika Šulganová, 2015. "Úvěry v selhání a makroekonomika: modelování systémového kreditního rizika v České republice
      [Non-Performing Loans and The Macroeconomy: Modeling the Systemic Credit Risk in the Czech Republic]
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(8), pages 921-947.
    6. Han, Rui & Melecky, Martin, 2013. "Financial inclusion for financial stability : access to bank deposits and the growth of deposits in the Global Financial Crisis," Policy Research Working Paper Series 6577, The World Bank.
    7. Buncic, Daniel & Tischhauser, Martin, 2017. "Macroeconomic factors and equity premium predictability," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 621-644.
    8. Daniel Buncic, 2016. "Superforecasting: The Art and Science of Prediction. By Philip Tetlock and Dan Gardner," Risks, MDPI, Open Access Journal, vol. 4(3), pages 1-5, July.
    9. Maimbo, Samuel Munzele & Melecky, Martin, 2014. "Financial sector policy in practice : benchmarking financial sector strategies around the world," Policy Research Working Paper Series 6746, The World Bank.
    10. Beck, Thorsten & De Jonghe, Olivier, 2013. "Lending concentration, bank performance and systemic risk : exploring cross-country variation," Policy Research Working Paper Series 6604, The World Bank.
    11. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, March.
    12. Hosszú, Zsuzsanna & Körmendi, Gyöngyi & Mérő, Bence, 2016. "Egy- és többváltozós szűrők a hitelrés alakulásának meghatározására
      [Filters with single or multiple variables in measuring the size of the credit gap]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 233-259.
    13. Brown, Martin, 2013. "The transmission of banking crises to households : lessons from the 2008-2011 crises in the ECA region," Policy Research Working Paper Series 6528, The World Bank.
    14. Vouldis, Angelos, 2015. "Credit market disequilibrium in Greece (2003-2011) - a Bayesian approach," Working Paper Series 1805, European Central Bank.
    15. Buncic, Daniel & Moretto, Carlo, 2015. "Forecasting copper prices with dynamic averaging and selection models," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 1-38.

    More about this item

    Keywords

    Equilibrium Credit; Macroprudential Supervision; Demand for Credit; Time-Series Panel Data; High- and Middle Income Countries;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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