Equilibrium Credit: The Reference Point for Macroprudential Supervisors

62 Pages Posted: 19 Aug 2013

See all articles by Daniel Buncic

Daniel Buncic

Stockholm University - Stockholm Business School

Martin Melecky

World Bank

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Date Written: August 18, 2013

Abstract

Equilibrium credit is an important concept because it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. It uses two stages 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, this paper provides 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. Countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared with other regions of the world.

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

JEL Classification: G28, G21, E58

Suggested Citation

Buncic, Daniel and Melecky, Martin, Equilibrium Credit: The Reference Point for Macroprudential Supervisors (August 18, 2013). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2312065 or http://dx.doi.org/10.2139/ssrn.2312065

Daniel Buncic (Contact Author)

Stockholm University - Stockholm Business School

Sweden

Martin Melecky

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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