An Anatomy of Credit Booms and their Demise

Number: 670
Authors: Enrique Mendoza; Marco Terrones
Language: English
Date: July 2012
Abstract: What are the stylized facts that characterize the dynamics of credit booms and the associated
fluctuations in macro-economic aggregates? This paper answers this question by applying a method
proposed in our earlier work for measuring and identifying credit booms to data for 61 emerging
and industrialized countries over the 1960-2010 period. We identify 70 credit boom events, half of
them in each group of countries. Event analysis shows a systematic relationship between credit
booms and a boom-bust cycle in production and absorption, asset prices, real exchange rates, capital
inflows, and external deficits. Credit booms are synchronized internationally and show three
striking similarities between industrialized and emerging economies: (1) credit booms are similar in
duration and magnitude, normalized by the cyclical variability of credit; (2) banking crises,
currency crises or sudden stops often follow credit booms, and they do so at similar frequencies in
industrialized and emerging economies; and (3) credit booms often follow surges in capital
inflows, TFP gains, and financial reforms, and are far more common with managed than flexible
exchange rates.
Document: dtbc670.pdf (550 Kb)