When to Lean Against the Wind
37 Pages Posted: 4 Aug 2017 Last revised: 2 Jul 2018
Date Written: July 2017
This paper shows that policy-makers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan-to-deposit-ratio are much more likely to end in a systemic banking crisis. We evaluate the predictive accuracy for different classification models and show that the characteristics of the credit boom contain valuable information for sorting the data into good and bad booms. Importantly, we demonstrate that policy-makers have the ability to spot dangerous credit booms on the basis of data available in real time. We also show that these results are robust across alternative specifications and time periods.
Keywords: Banking Crisis, Credit Booms, crisis prediction, macroprudential policy
JEL Classification: E32, E52, G01
Suggested Citation: Suggested Citation