Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability

43 Pages Posted: 15 Feb 2022

See all articles by Yizhi Xu

Yizhi Xu

International Monetary Fund (IMF)

Ken Gan

International Monetary Fund (IMF)

Manchun Wang

Independent

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Woon Gyu Choi

International Monetary Fund (IMF); The Bank of Korea; Bank of Korea - Economic Research Institute

Pierre Guérin

International Monetary Fund

Samuel Mann

International Monetary Fund (IMF)

Date Written: August 2021

Abstract

After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. We investigate the empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies. We find that loose financial conditions contribute to leverage buildups and generate an intertemporal tradeoff: financial stability risk is lessened in the near term but exacerbated in the medium term. The tradeoff is amplified during credit booms, when debt service burdens are particularly high, or when the share of foreign currency debt is high in emerging markets. Selected macroprudential tools can arrest leverage buildups and mitigate the tradeoff.

Keywords: leverage buildup, A. Macroprudential policy, loose financial conditions, Policy implication, B. Macroprudential policy, Credit booms, Macroprudential policy, Central bank policy rate, Macroprudential policy instruments, Financial sector stability, Global

JEL Classification: E52, G21, G28, E44, E50, E43, G18

Suggested Citation

Xu, Yizhi and Gan, Ken and Wang, Manchun and Barajas, Adolfo and Choi, Woon Gyu and Guérin, Pierre and Mann, Samuel, Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability (August 2021). IMF Working Paper No. 2021/222, Available at SSRN: https://ssrn.com/abstract=4026423

Yizhi Xu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ken Gan

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Manchun Wang

Independent

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Woon Gyu Choi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

The Bank of Korea ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794, 100-794

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Pierre Guérin

International Monetary Fund ( email )

Kuwait

Samuel Mann

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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