The Determinants of Private Sector Credit in Industrialised Countries: Do Property Prices Matter?

39 Pages Posted: 13 Dec 2005

See all articles by Boris Hofmann

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: December 2001

Abstract

Episodes of boom and bust in credit markets have often coincided with cycles in economic activity and property markets. The coincidence of these cycles has already been widely documented in the literature, but few studies address the issue in a formal way. In this study we analyse the determinants of credit to the private non-bank sector in 16 industrialised countries since 1980 based on a cointegrating VAR. Cointegration tests suggest that the long-run development of credit cannot be explained by standard credit demand factors. But once real property prices, measured as a weighted average of real residential and real commercial property prices, are added to the system, we are able to identify long-run relationships linking real credit positively to real GDP and real property prices and negatively to the real interest rate. These long-run relationships may be interpreted as long-run extended credit demand relationships, but we may also capture effects on credit supply. Impulse response analysis based on a standard Cholesky decomposition reveals that there is significant two-way dynamic interaction between bank credit and property prices. We also find that innovations to the short-term real interest rate have a strong and significant negative effect on bank credit, GDP and property prices.

Suggested Citation

Hofmann, Boris, The Determinants of Private Sector Credit in Industrialised Countries: Do Property Prices Matter? (December 2001). BIS Working Paper No. 108, Available at SSRN: https://ssrn.com/abstract=847404 or http://dx.doi.org/10.2139/ssrn.847404

Boris Hofmann (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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