What is it about?
ABSTRACT. We assess the persistence of the credit-to-GDP ratio over more than 130 years of data for 11 advanced economies, employing an approach based on fractional integration and allowing for non-linearities. We show how the time series properties of the data changed around World War II (WWII). Moreover, our findings are consistent with the idea that the supply of mortgage loans has been particularly strong since WWII, in the sense that the degree of integration of the leverage ratio obtained with only these loans is larger than that of the ratio obtained with the total loans for almost all the studied countries. Nevertheless, it is generally the case that both types of ratios show a higher degree of integration after WWII than before it, though often insignificantly, and that their time trends are significant only after WWII.
Featured Image
Why is it important?
Due to the boom-bust cycle of the last 15 years, the evolution of bank credit has attracted a lot of attention, with particular emphasis put on how credit behaves relative to gross domestic product (GDP). Policymakers have proposed using the deviations of the credit-to-GDP ratio from its long-run trend (the credit-to-GDP gap) as guidance for the countercyclical adjustment of the bank capital buffer (Basel Committee on Banking Supervision 2010). Moreover, there is evidence that the credit-to-GDP ratio is a more meaningful signal of strains in financial markets than ratios based on money aggregates, being consistent with the fact that, after World War II (WWII), credit has grown faster than money (Schularick and Taylor 2012).
Perspectives
We study the persistence of the credit-to-GDP ratio over a period of 130 years in terms of long-range dependence and, thus, we flexibly and precisely assess its time series properties by testing for fractional integration (Robinson 1994). We conduct this exercise for 11 advanced countries, and for most of them we also include in the same analysis the data on mortgage credit, making different assumptions about the residuals and allowing for nonlinearities.
Tommaso Trani
Universidad de Navarra
Read the Original
This page is a summary of: The Evolution of the Credit-to-GDP Ratio: An Empirical Analysis, International Review of Finance, November 2017, Wiley,
DOI: 10.1111/irfi.12165.
You can read the full text:
Contributors
The following have contributed to this page