The Aftermath of Credit Booms: Evidence from Credit Ceiling Removals
82 Pages Posted: 25 Oct 2023
Date Written: September 26, 2023
We study removals of "credit ceilings," quantitative limits on bank credit supply imposed by many countries until the 1980s. Exploiting differences in loan types affected, we find that these removals predict sudden increases in bank credit, residential investment, house prices, and stock prices, followed by reversals, recessions, and banking crises. These effects are separate from those of other financial deregulations. Our analysis explores two phenomena related to credit booms: the "calm before the storm" and "irreversibility." Overall, our results suggest that credit supply shocks do not simply amplify existing fragilities but can initiate economic boom-and-bust cycles on their own.
Keywords: credit booms, banking crises, financial deregulation
JEL Classification: E51, G01, G15, G21, N20
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