The Aftermath of Credit Booms: Evidence from Credit Ceiling Removals

Abstract

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