Credit booms fuelled by lax monetary policy: IMF paper

Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies, according to an International Monetary Fund paper published on Friday.

Selim Elekdag and Yiqun Wu, the paper's authors, use macroeconomic and bank-level data to identify the external drivers that influenced the 99 credit booms that took place between 1960 and 2010. The authors say episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises.

They find that domestic policy rates were often below-trend during the pre-peak phase of credit booms, and are likely to have fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates were virtually flat during these periods. The results suggest that although external factors such as global liquidity conditions matter, domestic factors, in particular monetary policy, also appear to be important drivers of real credit growth across emerging economies.

Click here to read the paper.