Make It or Break It? Assessing Credit Booms in Developing Countriesâ€

Daniela Marchettini and Rodolfo Maino

Journal of African Economies, 2018, vol. 27, issue 5, 558-586

Abstract: In this paper, we argue that the assessment of systemic risk associated with rapid credit growth should be conducted with different tools at different stages of financial development. In particular, using a signal detection framework, we show that, when the level of financial development is low, the most used leading indicator of banking crisis, namely the credit-to-GDP gap, has poor predictive performance, as it is unable to disentangle episodes of financial deepening from bubble-like credit booms. On the contrary, a new class of indicators, comparing credit levels to structural benchmarks, has good capacity to correctly predict financial crises in economies in the early stages of financial development.

Keywords: early warning indicators; credit booms; financial deepening; systemic risk; non-parametric methods (search for similar items in EconPapers)
Date: 2018
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