Options
Equilibrium Credit: The Reference Point for Macroprudential Supervisors
Journal
Journal of Banking and Finance
ISSN
0378-4266
ISSN-Digital
1872-6372
Type
journal article
Date Issued
2014-04-01
Author(s)
Melecky, Martin
Abstract
Equilibrium credit is an important concept because it helps to identify excessive credit provision in an economy. This paper proposes a structural approach to determine equilibrium credit which is based on the long-run through-the-cycle transaction demand for credit. Using a panel data set consisting of 49 high and middle-income countries from 1980 to 2010, we show that there exists considerable variation in the cross-country estimates of the income and price elasticities of credit and that the unit elasticity restriction implicitly imposed by the credit-to-GDP ratio is strongly rejected by the data. This suggests that the credit-to-GDP ratio is not appropriate to measure equilibrium credit. We show further that the cross-sectional variation in the income and price elasticities of credit can be related to a set of relevant economic, financial and institutional development indicators of a country. The main determinants that explain the cross-sectional variation in the income and price elasticities are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and the experience of a financial crisis. As an empirical illustration, we compute equilibrium credit and credit gaps for eleven new EU member states using our structural framework and compare it to credit gaps based on the Basel III approach.
Language
English
Keywords
Equilibrium credit
Macroprudential supervision
Demand for credit
Time-series panel data
High- and middle income countries
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
41
Number
4
Start page
135
End page
154
Pages
20
Subject(s)
Division(s)
Eprints ID
236410