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Book part
Publication date: 11 December 2004

Barry Eichengreen and Kris J. Mitchener

The experience of the 1990s renewed economists’ interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic…

Abstract

The experience of the 1990s renewed economists’ interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organization and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realized. In addition, the structure and management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression.

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Research in Economic History
Type: Book
ISBN: 978-1-84950-282-5

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Article
Publication date: 9 June 2020

Vítor Castro and Rodrigo Martins

This paper analyses the collapse of credit booms into soft landings or systemic banking crises.

Abstract

Purpose

This paper analyses the collapse of credit booms into soft landings or systemic banking crises.

Design/methodology/approach

A discrete-time competing risks duration model is employed to disentangle the factors behind the length of benign and harmful credit booms.

Findings

The results show that economic growth and monetary authorities play the major role in explaining the differences in the length and outcome of credit booms. Moreover, both types of credit expansions display positive duration dependence, i.e. both are more likely to end as they grow older, but hard landing credit booms have proven to be longer than those that land softly.

Originality/value

This paper contributes to our understanding of what affects the length of credit booms and why some end up creating havoc and others do not. In particular, it calls the attention to the important role that Central Bank independence plays regarding credit booms length and outcome.

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Journal of Economic Studies, vol. 47 no. 6
Type: Research Article
ISSN: 0144-3585

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Book part
Publication date: 26 April 2014

Michael D. Bordo and John Landon-Lane

In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit and house price booms.

Abstract

Purpose

In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit and house price booms.

Method

Using a panel of 11 OECD countries from 1920 to 2011 we estimate a panel VAR in order to identify loose monetary policy shocks, low inflation shocks, bank credit shocks, and house price shocks.

Findings

We show that during boom periods there is a heightened impact of all three “policy” shocks with the bank credit shock playing an important role. However, when we look at individual house price boom episodes the cause of the price boom is not so clear. The evidence suggests that the house price boom that occurred in the United States during the 1990s and 2000s was not due to easy bank credit.

Research limitations/implications

Shocks from the shadow banking system are not separately identified. These are incorporated into the fourth “catch-all” shock.

Practical implications

Our evidence on housing price booms that expansionary monetary policy is a significant trigger buttresses the case for central banks following stable monetary policies based on well understood and credible rules.

Originality/value of paper

This paper uses historical evidence to evaluate the relative importance of three main causes of house price booms. Our results bring into question the commonly held view that loose bank credit was to blame for the U.S. house price bubble of the later 1990s.

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Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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Article
Publication date: 26 October 2018

Silvana Bartoletto, Bruno Chiarini, Elisabetta Marzano and Paolo Piselli

This paper aims to focus on the banking crises recorded in Italy in the period 1861-2016 and to propose a novel classification based upon the timing of the crisis with…

Abstract

Purpose

This paper aims to focus on the banking crises recorded in Italy in the period 1861-2016 and to propose a novel classification based upon the timing of the crisis with respect to the business cycle.

Design/methodology/approach

A simple and objective rule to distinguish between slowdown and inner-banking crises is introduced. The real impact of banking crises is evaluated by integrating the narrative approach with an empirical vector autoregression analysis.

Findings

First, banking crises are not always associated to economic downturns. Especially in Italy, (but this analysis can be easily extended to other countries), they have often limited their negative effects within the financial system (“inner” crises). Second, the simultaneity of macroeconomic effects (credit contraction and GDP recession) leave the causal link undetermined. Third, the empirical and narrative analyses performed testify that boom–bust mechanisms are an exception in the panorama of (Italian) banking crises; although when the economy experiences such episodes, the economic and social consequences are not only severe but also enduring.

Research limitations/implications

To classify historically recognized banking crisis episodes, the authors look at credit and GDP dynamics (and their ratio) around crisis years. Relying on a single definition of crisis is avoided. The classification provides an empirical rule to determine in what way banking crises differ. The classification is mostly based on the synchronization with the business cycle and, using the documented evolution of macroeconomic aggregates, it permits to highlight the fact that a variety of interactions occur between financial and real aggregates during and around banking crises.

Originality/value

As to the concept of systemic banking crisis, a qualitative judgment is often adopted to select relevant episodes, thus confirming the absence of a quantitative rule in classification criteria (Chaudron and de Haan, 2014). This paper proposes a simple and objective rule to distinguish between slowdown and inner-banking crises; the former occur close to a GDP contraction, whereas the latter appear to spread their effects with no substantial evidence of output loss.

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Journal of Financial Economic Policy, vol. 11 no. 1
Type: Research Article
ISSN: 1757-6385

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Book part
Publication date: 9 November 2009

Risto Herrala

We test the hypothesis that credit quality deteriorates during credit booms. The test case is a pronounced cycle in connection with a banking crisis, ranked among the most…

Abstract

We test the hypothesis that credit quality deteriorates during credit booms. The test case is a pronounced cycle in connection with a banking crisis, ranked among the most extreme in international studies. A unique data set allows us to rate household borrowers during the cycle, and aggregate the ratings to the macroeconomic level. The post-crisis period is also studied to find changes in credit quality.

The method reveals significant variation in average ratings of household borrowers during the crisis cycle and its aftermath. We find that ‘point-in-time’ ratings, calculated with realised data, do not indicate deterioration in average credit quality during the credit boom. In contrast, ‘through-the-cycle’ ratings, constructed by using data that is cleaned from cyclical variation, behave in accordance with the hypothesis. By all measures used, a significant improvement in the average quality of borrowers is found during the post-crisis period.

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Credit, Currency, or Derivatives: Instruments of Global Financial Stability Or crisis?
Type: Book
ISBN: 978-1-84950-601-4

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Article
Publication date: 15 January 2020

Vighneswara Swamy

The significant economic weight of the Eurozone in the globe caused the contagion of the Eurozone debt crisis on the emerging markets. The Eurozone debt crisis caused the…

Abstract

Purpose

The significant economic weight of the Eurozone in the globe caused the contagion of the Eurozone debt crisis on the emerging markets. The Eurozone debt crisis caused the sudden plummeting of the cross-border bank credit (BC) to India causing a significant impact on bank lending in India. Essentially, the purpose of this study is to find an answer to the question: Did the decline in cross-border cross-credit from Eurozone had an impact on domestic BC in India?

Design/methodology/approach

Using the data for the period from 2000 to 2013 sourced from Bank for International Settlements international banking statistics consolidated data sets, the novel specification of the study captures the impact of Eurozone cross-border credit on India by developing two regression frameworks that capture the pre-Euro debt crisis period scenario and post-Euro debt crisis period scenario.

Findings

The results offer a very interesting analogy of the behavior of BC and cross-border credit during the pre and post-Eurozone crisis scenarios of analysis. During the pre-Eurozone crisis period, cross-border credit displayed a significant negative relationship with BC indicating that cross-border credit to the Indian firms indirectly benefitted the banks by creating increased demand for domestic BC. The post-Eurozone crisis period witnessed a nexus between cross-border credit and BC during the pre-Eurozone crisis period, which gradually disappeared largely because of the onset of the Eurozone crisis.

Originality/value

This study is a first of its kind in investigating the impact of the Eurozone crisis on an emerging economy like India. This study supports the hypothesis of the existence of the transmission of financial shocks through the balance sheets of international banks. The findings conform to the policy concerns of most of the emerging economies that international banks transmit financial shocks from their home countries. The implication for India and other emerging economies is that international credit growth deserves careful monitoring.

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Journal of Financial Economic Policy, vol. 12 no. 4
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 1 April 1987

Steve Worthington

Credit cards are in the news again. In 1986 there was a rise of 14% in the amount of outstanding consumer credit, more than three times the rise in prices and double the…

Abstract

Credit cards are in the news again. In 1986 there was a rise of 14% in the amount of outstanding consumer credit, more than three times the rise in prices and double the rise in earning. Credit advanced in March 1987 was at a record level of £3.2bn. And retailer credit cards are doing excellent business. This feature looks at the background to the credit card explosion and then examines, in detail, the latest recruit to the fold, the Co‐op VISA card. We also take a look at the Connect card story, and conclude with a summary of the RMDP survey on retailers' attitudes to EFTPoS.

Details

Retail and Distribution Management, vol. 15 no. 4
Type: Research Article
ISSN: 0307-2363

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Book part
Publication date: 4 December 2018

Indranarain Ramlall

Abstract

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Understanding Financial Stability
Type: Book
ISBN: 978-1-78756-834-1

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Article
Publication date: 8 November 2011

Puspa Amri, Apanard P. Angkinand and Clas Wihlborg

The recurrence of banking crises throughout the 1980s and 1990s, and in the more recent 2008‐09 global financial crisis, has led to an expanding empirical literature on…

Abstract

Purpose

The recurrence of banking crises throughout the 1980s and 1990s, and in the more recent 2008‐09 global financial crisis, has led to an expanding empirical literature on crisis explanation and prediction. The purpose of this paper is to provide an analytical review of proxies for and important determinants of banking crises‐credit growth, financial liberalization, bank regulation and supervision.

Design/methodology/approach

The study surveys the banking crisis literature by comparing proxies for and measures of banking crises and policy‐related variables in the literature. Advantages and disadvantages of different proxies are discussed.

Findings

Disagreements about determinants of banking crises are in part explained by the difference in the chosen proxies used in empirical models. The usefulness of different proxies depends partly on constraints in terms of time and country coverage but also on what particular policy question is asked.

Originality/value

The study offers a comprehensive analysis of measurements of banking crises, credit growth, financial liberalization and banking regulations and concludes with an assessment of existing proxies and databases. Since, the review points to the choice of proxies that best fit specific research objectives, it should serve as a reference point for empirical researchers in the banking crisis area.

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