The role of household and business credit in banking crises

Private credit expansions are an important predictor of subsequent banking crises. We revisit that result with a new dataset from developed and developing countries that decomposes private credit into household credit and enterprise credit. We argue that household credit growth raises debt levels without much effect on long-term income. Rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis. Enterprise credit expansions can have the same effects but it is tempered by the associated increase in income. Our estimates show that household credit expansions have been a statistically and economically significant predictor of banking crises. Enterprise credit expansions are also associated with banking crises but their effect is weaker and less robust.     

Is the proposed East African Monetary Union an optimal currency area? a structural vector autoregression analysis

This paper empirically assesses the suitability of the East African (EA) countries for a regional monetary union by testing for symmetry of the underlying structural shocks. The results indicate that supply and demand shocks are generally asymmetric, which does not lend strong support for forming a currency union in the EA region at the moment. However, the speed and magnitude of adjustment to shocks is similar across the countries. Therefore, further integration of the economies might lead to more favorable conditions for a monetary union. Although evidence in favor of linking an EA currency to an external anchor is weak, such support seems to favor the Euro.     

The Devil you Know: Pegs vs Floats with Uncertain Outcomes

Theory predicts that a fixed exchange rate regime will be abandoned after a sizable economic shock as currency devaluation could stimulate exports and output. However, devaluation is risky as the new level of the exchange rate and the rate of inflation cannot be predicted. We show that this uncertainty creates resistance to devaluation. Policymakers prefer to maintain the fixed exchange rate and to undergo internal adjustment. We illustrate the point theoretically and provide supporting evidence from Bulgaria's currency board.     

Fixed exchange rate credibility with heterogeneous expectations

After disinflation has been achieved, agents who form more sophisticated forecasts have lower confidence in the sustainability of a peg compared to less sophisticated agents. Furthermore, sustained financial stability leads to a declining proportion of sophisticated agents. Thus, the credibility of a fixed exchange rate regime grows over time partly because fewer people pay attention to the workings of the monetary regime. These results are derived in a rules-versus-discretion model of a fixed exchange rate regime with heterogeneous agents. We provide unique supporting evidence using data on expectations and information about the monetary regime from Bulgaria’s currency board.     

Tax Structures and FDI: The Deterrent Effects of Complexity and Uncertainty

This paper measures the distortionary and distributional effects of housing subsidies in the Netherlands. Its broad scope allows us to discuss the results in the light of the main justifications for subsidising housing, i.e. the merit–good argument, external effects and the distribution motive. Our measurements reveal some patterns of subsidisation that seem difficult to justify on these grounds. This applies especially to the differences between subsidisation of rental and owneroccupied housing and between mortgage– and equity–financed ownership. Moreover, the inelastic supply of housing in the Netherlands entails that subsidisation has only a limited effect on promoting housing quality.     

Incentive Targeting, Influence Peddling, and Foreign Direct Investment

We expand the traditional tax incentive redundancy argument by investigating the implications of allocating incentives primarily to firms that would have invested even in the absence of special tax treatment. Incorporating government revenue constraints, pliable tax officials, endogenous tax liabilities, and firms with heterogeneous before-tax returns, we show that tax incentives, if given to the wrong firms, are not only ineffective in stimulating FDI, but result in a form of tax shifting and may reduce FDI. Data from countries of the former Eastern Bloc suggests that tax incentive schemes have significantly negative impacts on FDI in countries that poorly target firms.     

IMF Conditionality and Objections: The Russian Case

Emerging economies in crisis typically request assistance from the International Monetary Fund (IMF). After evaluating the situation, the IMF makes a loan available to the country, conditional on certain policy reforms. Governments usually resist many of these measures and negotiation ensues. This paper analyzes the most contentious measures of IMF conditionality in the context of Russia after the August 1998 crisis. The most discussed measures include the budget deficit, structural reforms, and exchange rate policy. Our analysis suggests that to some extent the disagreement arose because the IMF is focused on changing steady states somewhat ignoring the transition path, while the Russian government is preoccupied with transitional dynamics without a clearly defined steady state concept.     

Credit information sharing and banking crises: An empirical investigation

We study the effect of credit information sharing on the likelihood of banking crises using a comprehensive cross-country dataset for the period from 1975 to 2006. The empirical analysis shows that credit information sharing reduces the likelihood of banking crises and it does more so in low income countries. The effect is statistically and economically significant, and applies to both public registries and private bureaus. Furthermore, we show that credit information sharing reduces the impact of rapid credit growth on banking crises. Specifically, rapid credit growth is less likely to lead to a banking crisis in countries with credit information sharing.     

Stock markets,banks and the sources of economic growth in low and high income countries

This paper studies the effects of stock markets and banks on the sources of economic growth, productivity and capital accumulation, using a large cross country panel that includes high- and low-income countries. Results show that, in low-income countries, banks have a sizable positive effect on capital accumulation. We find that stock markets, however, have not contributed to capital accumulation or productivity growth in these countries. Given the emphasis that has been placed in developing equity markets in developing countries, these findings are somewhat surprising. Conversely, in high-income countries, stock markets are found to have sizable positive effects on both productivity and capital growth, while banks only affect capital accumulation.     

Fear of floating

This paper uses unique household survey data to investigate the expected effects of a switch from a fixed exchange rate regime to a floating exchange rate regime in Bulgaria during the global financial crisis. The data show that the public associated such a switch with a contraction of output, higher prices, a decline in exports, and an overall deterioration of economic welfare. These expectations fuelled a strong opposition to removing the fixed exchange rate. Thus, the survey data allow us to investigate why a switch from a fixed exchange rate to a floating exchange rate did not take place.