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Equilibrium credit : the reference point for macroprudential supervisors, Volume 1
 
Author:Buncic, Daniel; Melecky, Martin; Collection Title:Policy Research working paper ; no. WPS 6358
Country:World; Europe and Central Asia; Date Stored:2013/02/11
Document Date:2013/02/01Document Type:Policy Research Working Paper
SubTopics:Access to Finance; Economic Theory & Research; Currencies and Exchange Rates; Banks & Banking Reform; Debt MarketsLanguage:English
Region:The World Region; Europe and Central AsiaReport Number:WPS6358
Volume No:1  

Summary: Equilibrium credit is an important concept because it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. It uses two stages to study changes in the demand for credit due to varying levels of economic, financial and institutional development of a country. Using a panel of high and middle-income countries over the period 1980-2010, this paper provides empirical evidence that the credit-to-GDP ratio is inappropriate to measure equilibrium credit. The reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development. The main drivers of this heterogeneity 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 experience of a financial crisis. Countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared with other regions of the world.

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