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Credit Booms, Banking Crises, and the Current Account

Jonathan Davis (), Adrienne Mack, Wesley Phoa and Anne Vandenabeele
Additional contact information
Adrienne Mack: Federal Reserve Bank of Dallas
Wesley Phoa: The Capital Group Companies
Anne Vandenabeele: The Capital Group Companies

No 292014, Working Papers from Hong Kong Institute for Monetary Research

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.

Keywords: Banking Crises; Credit Booms; Current Account (search for similar items in EconPapers)
JEL-codes: E51 F32 F40 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-11
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: Credit booms, banking crises, and the current account (2016) Downloads
Working Paper: Credit booms, banking crises, and the current account (2014) Downloads
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