Current Account and Credit Growth: The Role of Household Credit and Financial Depth

Ekinci, Mehmet Fatih and Omay, Tolga (2019): Current Account and Credit Growth: The Role of Household Credit and Financial Depth.

Abstract

Understanding the impact of financial variables on the current account balance is one of the priorities of academic literature and policy makers. Evidence from a broad panel of countries shows that an increase in the credit growth causes a significant deterioration in the current account balance. We find that this result is driven by household credit. Furthermore, we show that total and household credit growth rates have a stronger negative effect on the current account balance for lower levels of financial depth. In other words, the demand boom associated with the credit expansion gets weaker for higher levels of financial depth. Thus, our findings are in line with the ``too much finance'' hypothesis which states that positive impact of financial development on economic growth vanishes as the level of financial depth increases. Our results suggest that targeted policy measures which curb the excessive household credit growth might be more effective to reduce the external imbalances particularly at the early stages of financial deepening.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Growth, Current Account Balance, Global Imbalances and Panel Data
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements

References

Aikman, D., Haldane, A. and Nelson,B. [2015], ``Curbing the Credit Cycle", Economic Journal, vol. 125(585), 1072-1109.

Alessi, L., Detken, C. [2018] ``Identifying excessive credit growth and leverage", Journal of Financial Stability, vol. 35(C), pages 215-225.

Arcand, J., Berkes, E. and Panizza,U. [2012] ``Too much finance?", IMF Working Paper 12/161.

Atoyan, R., J. Manning and J. Rahman [2013] ``Rebalancing: Evidence from Current Account Adjustment in Europe", IMF Working Paper, No: 13/74.

Babecky, J., Havranek, T., Mateju, J., Rusnak, M., Smidkova, K. and Vasicek, B. [2014] ``Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators", Journal of Financial Stability, vol. 15(C), pages 1-17.

Beck, R., Georgiadis, G. and Straub, R. [2014] ``The finance and growth nexus revisited", Economics Letters, vol. 124(3), pages 382-385.

Beck T., Buyukkarabacak B., Rioja F. and Valev N. [2012] ``Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries", The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-46, March.

Bezemer, D., Samarina, A. and Zhang, L. [2017] ``The shift in bank credit allocation: new data and new findings", DNB Working Papers 559, Netherlands Central Bank, Research Department.

Biggs, M., Mayer, T. and Pick, A. [2009] ``Credit and Economic Recovery", DNB Working Paper No. 218. Biggs, M., T. Mayer and Pick, A. [2010] ``Credit and Economic Recovery: Demystifying Phoenix Miracles", SSRN Working Paper.

Bridges, J., Jackson, C. and McGregor, D. [2017] ``Down in the Slumps: The Role of Credit in Five Decades of Recessions", Bank of England Staff Working Paper No. 659. Borio, C. [2012] ``The Financial Cycle and Macroeconomics: What Have We Learnt?", BIS Working Papers, No. 395.

Bruno, V, Shim, I. and Shin, H. [2017] ``Comparative assessment of macroprudential policies", Journal of Financial Stability, Elsevier, vol. 28(C), pages 183-202.

Buyukkarabacak, B. and S. Krause [2009] ``Studying the Effects of Household and Firm Credit on the Trade Balance: The Composition of Fund Matters", Economic Inquiry, Vol. 47, No. 4, pp. 653-666.

Calderon, C. A., A. Chong and N. Loayza [2002] ``Determinants of Current Account Deficits in Developing Countries", Contribution to Macroeconomics, Vol. 2, Iss. 1.

Catao, L. and G.M. Miles-Ferretti [2014] ``External Liabilities and Crises", Journal of International Economics, Elsevier, vol. 94(1), pages 18-32.

Cerutti, E., Correa, R., Fiorentino, E. and Segalla, E. [2017] ``Changes in Prudential Policy Instruments - A New Cross-Country Database", International Journal of Central Banking, vol. 13(2), pages 477-503, March.

Cecchetti, S. G., and E. Kharroubi [2012] ``Reassessing the Impact of Finance on Growth", Bank for International Settlements Working Papers 381.

Cheung, C., D. Furceri and E. Rusticelli [2013] ``Structural and Cyclical Factors behind Current Account Balances", Review of International Economics, Vol. 21, Iss.5, pp. 923-944.

Chinn, M. , Eichengreen, B. and Ito, H. [2014] ``A forensic analysis of global imbalances", Oxford Economic Papers, vol. 66(2), pages 465-490.

Chinn, M. D. and H. Ito, H. [2007] ``Current Account Balances, Financial Development and Institutions: Assaying the World 'Saving Glut'" Journal of International Money and Finance, Elsevier, Vol. 26, Iss. 4, pp. 546-569.

Coricelli, F., Mucci, F., Revoltella, D. [2006] ``Household Credit in the New Europe: Lending Boom or Sustainable Growth?", CEPR Discussion Papers 5520.

Demirguc-Kunt, A., and R. Levine [2008] ``Finance, Financial Sector Policies, and Long-Run Growth", The World Bank Policy Research Working Paper, WPS 4469.

Ekinci, M. F., Erdem, F. P. and Z. Kilinc [2015] ``Credit growth, current account and financial depth", Applied Economics, 47(17), 1809-1821.

Gruber, J. W. and S. B. Kamin [2007] ``Explaining the Global Pattern of Current Account Imbalances", Journal of International Money and Finance, Vol. 26, pp. 500-522.

Gruber, J. W. and S. B. Kamin [2009] ``Do Differences in Financial Development Explain the Global Pattern of Current Account Imbalances?", Review of International Economics, vol. 17, no. 4, pp. 667-688.

Hasan, I., Wachtel, P. and Zhou, M. [2009] ``Institutional development, financial deepening and economic growth: Evidence from China", Journal of Banking and Finance, vol. 33(1), pages 157-170, January.

Hiebert, P., Jaccard, I. and Schüler, Y. [2018] ``Contrasting financial and business cycles: Stylized facts and candidate explanations", Journal of Financial Stability, vol. 38(C), pp. 72-80.

Islam, R. [2017] ``Credit Composition, Output Composition, and External Balances", World Bank Policy Research Working Paper 8082.

Jorda, O., Schularick, M. and Taylor,A. [2011] ``Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons", IMF Economic Review, vol. 59(2), pages 340-378, June.

Kaminsky, G.L., Reinhart, C.M. [1999] ``The twin crises: the causes of banking and balance-of-payments problems", American Economic Review, 89 (3), 473–500.

King, R.G., and Levine, R. [1993] ``Finance and Growth: Schumpeter Might be Right", Quarterly Journal of Economics, 108, 717–37.

Lane, P. R. and G. M. Milesi-Ferretti [2012] ``External Adjustment and the Global Crisis", Journal of International Economics, Vol. 88, Iss. 2, pp. 252-265.

Law, S. and Singh, N. [2014] ``Does too much finance harm economic growth?", Journal of Banking and Finance, Elsevier, vol. 41(C), pages 36-44.

Levine, R. [2005] ``Finance and Growth: Theory and Evidence", In Handbook of Economic Growth, edited by P. Aghion and S. Durlauf. The Netherlands: Elsevier Science.

Pesaran, M.H. [2004] ``General diagnostic tests for cross section dependence in panels", Cambridge Working Papers in Economics, 0435, University of Cambridge.

Pesaran, M.H. [2006] ``Estimation and inference in large heterogeneous panels with a multifactor error structure", Econometrica 74 (4), 967–1012.

Phillips, S., Catao, L., Ricci, L., Bems, Rudolfs, Das, M., Di Giovanni, J., Unsal, D., Castillo, M., Lee, J., Rodriguez, J. and Vargas, M. [2013] ``External Balance Assessment (EBA): Technical Background", IMF Working Paper 13/272.

Samargandi, N., Fidrmuc, J. and Ghosh, S. [2015] ``Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries", World Development, Elsevier, vol. 68(C), pages 66-81.

Shen, C., and Lee, C. [2006] ``Same Financial Development yet Different Economic Growth - Why?", Journal of Money, Credit and Banking 38(7), 1907-1944.