Martin, Α. & Venture, J. (2014) “Managing credit bubbles“, VoxEU Organisation, 05 July.
There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.
Credit markets play an increasingly central role in modern economies. Within the OECD, for instance, domestic credit has risen from 100% of GDP in 1970 to approximately 160% of GDP in 2012 (as measured by the Bank for International Settlements). To be sure, this growth masks large variations across countries and over time, but there is a common feature to all these different country experiences that stands out. Credit has often alternated between ‘booms’ – periods of rapid growth – and ‘busts’ – periods of stagnation or significant decline. Moreover, there is some evidence that these credit booms and busts have become more common in recent years (Mendoza and Terrones 2012, Dell’Ariccia et al. 2012).
Relevant posts:
- Sayek, S. & Taskin, F. (2014) “Lessons from history for the European Financial Crisis“, VoxEU Organisation, 05 July.
- Baldacci, E., Gupta, S., Mulas-Granados, C. (2014) “Fiscal adjustment and growth: Beware of the credit constraints“, VoxEU Organisation, 31 March.
- Oppers, E. (2013) “Giving Credit Where Credit is Due: How to Design Policies that Work“, IMF direct, 02 October.