Credit booms,banking crises,and the current account |
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| Institution: | 1. Federal Reserve Bank of Dallas, Dallas, TX, USA;2. The Capital Group Companies, Los Angeles, CA, USA;1. Department of Monetary Finance, The College of Finance and Statistics, Hunan University, P.R.O.C.;2. Department of Finance and Banking, Shih Chien University, R.O.C.;3. Department of Finance, Chung Yuan Christian University, R.O.C;4. Department of Business Administration, National Taipei University, R.O.C;5. Dagong Credit Management School, Tianjin University of Finance and Economics, China;1. Johns Hopkins University, 3400 North Charles St., Baltimore, MD 21218, USA;2. Department of Economics and Darden GSB, University of Virginia, 248 McCormick Rd, Charlottesville, VA 22904, USA |
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| Abstract: | A number of papers have shown that rapid growth in private sector credit is a strong predictor of a banking crisis. This paper will ask if credit growth is itself the cause of a crisis, or is it the combination of credit growth and external deficits? This paper estimates a probabilistic model to find the marginal effect of private sector credit growth on the probability of a banking crisis. The model contains an interaction term between credit growth and the level of the current account, so the marginal effect of private sector credit growth may itself be a function of the level of the current account. We find that the marginal effect of rising private sector debt levels depends on an economy's external position. When the current account is in balance, the marginal effect of an increase in debt is rather small. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ratio is financed through foreign borrowing, this marginal effect is large. |
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