Equilibrium credit: The reference point for macroprudential supervisors

Daniel Buncic and Martin Melecký

Journal of Banking & Finance, 2014, vol. 41, issue C, 135-154

Abstract: Equilibrium credit is an important concept because it helps to identify excessive credit provision in an economy. This paper proposes a structural approach to determine equilibrium credit which is based on the long-run through-the-cycle transaction demand for credit. Using a panel data set consisting of 49 high and middle-income countries from 1980 to 2010, we show that there exists considerable variation in the cross-country estimates of the income and price elasticities of credit and that the unit elasticity restriction implicitly imposed by the credit-to-GDP ratio is strongly rejected by the data. This suggests that the credit-to-GDP ratio is not appropriate to measure equilibrium credit. We show further that the cross-sectional variation in the income and price elasticities of credit can be related to a set of relevant economic, financial and institutional development indicators of a country. The main determinants that explain the cross-sectional variation in the income and price elasticities are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and the experience of a financial crisis. As an empirical illustration, we compute equilibrium credit and credit gaps for eleven new EU member states using our structural framework and compare it to credit gaps based on the Basel III approach.

Keywords: Equilibrium credit; Macroprudential supervision; Demand for credit; Time-series panel data; High- and middle income countries (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Equilibrium Credit: The Reference Point for Macroprudential Supervisors (2014)
Working Paper: Equilibrium Credit: The Reference Point for Macroprudential Supervisors (2013)
Working Paper: Equilibrium credit: the reference point for macroprudential supervisors (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:41:y:2014:i:c:p:135-154

DOI: 10.1016/j.jbankfin.2014.01.005

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