Credit booms have frequently been identified as causes of financial crises. However, credit growth, and the supply of finance, in general, is intimately associated with economic growth. The purpose of this paper is to consider why Caribbean countries go through episodes of credit booms.
Two approaches are employed to identify credit booms. The first approach uses an ad hoc classification rule, while the second technique is based on a Markov‐switching vector autoregressive approach. To explain the number of credit boom episodes occurring over a particular period, a count data model is employed.
The results suggest that credit booms were more likely to occur during periods of low inflation, above trend economic growth, investment, money supply changes, and world growth. Relatively under‐developed financial systems as well as capital account liberalisation was also associated with the emergence of credit booms.
It is also possible that bank‐specific factors (e.g. capital adequacy, share of non‐performing loans and bank competition) may also be important determinants of the emergence of credit booms. However, data on these variables were not available over the sample period.
The study provides an alternative approach to identifying credit booms. In addition, the potential role played by external factors and economic policy are also considered.
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