Credit Booms and Macroeconomic Dynamics: Stylized Facts and Lessons for Low-Income Countries

Abstract

Using a comprehensive database on bank credit, covering 135 developing countries over the period 1960–2011, we identify, document, and compare the macro-economic dynamics of credit booms across low- and middle-income countries. The results suggest that while the duration and magnitude of credit booms is similar across country groups, macro-economic dynamics differ somewhat in low-income countries. We further find that surges in capital inflows are associated with credit booms. Moreover, credit booms associated with banking crises exhibit distinct macroeconomic dynamics, while also reflecting a potentially large deviation of credit from country fundamentals. These results suggest that low-income countries should remain mindful of the inter-linkages between financial liberalization, increased cross-border banking activities, and rapid credit growth.

Keywords: Credit booms, Low-income developing countries, Banking crisis, Bank supervision, macroeocnomic dynamics, low-income countries, emerging market economies., capital inflows, banking crises, financial deepening, banking supervision, financial reforms, financial liberalization, exchange rate flexibility, lending, financial crises, financial crisis, liquidity, trading, ownership, reserve requirements, economic growth, financial markets, state ownership, capital flows, empirical analysis, capital adequacy, bank restructuring, guarantees, interest rates, financial sector development, audits, financial integration, debt, financial distress, capital controls, emerging markets, risk taking, empirical

JEL Classification: E32, E44, E51, G21