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Why are credit booms sometimes sweet and sometimes sour?

Author

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  • Vítor Castro
  • Rodrigo Martins
Abstract
This paper investigates the commonalities and differences between benign credit booms and those that end up in banking crises by employing a Multinomial and a Sequential Logit model over a panel of industrial and developing countries. Some economic, political and institutional factors are found to play an important role in understanding the credit booms dynamics. In particular, this study shows that the quantity and price of credit, liquidity in the economy, economic growth, openness of the economy, government orientation, political stability and Central Bank independence are relevant to explain not only the occurrence of credit booms but also – and most importantly – whether they end up in a systemic banking crisis or not. While a better economic environment and Central Bank independence are essential for both industrial and developing countries to avoid credit booms from going badly, political factors seem to exert a stronger influence in developing countries.

Suggested Citation

  • Vítor Castro & Rodrigo Martins, 2021. "Why are credit booms sometimes sweet and sometimes sour?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3054-3074, April.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:2:p:3054-3074
    DOI: 10.1002/ijfe.1950
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    Cited by:

    1. Vítor Castro & Rodrigo Martins, 2020. "Riding the Wave of Credit: Are Longer Expansions Really a Bad Omen?," Open Economies Review, Springer, vol. 31(4), pages 729-751, September.
    2. Rym Ayadi & Sami B. Naceur & Sandra Challita, 2023. "Does income inequality really matter for credit booms?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(1), February.

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    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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