An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data

Mendoza, Enrique G.; Terrones, Marco E.

doi:10.3386/w14049

Cited by 398 publications

(400 citation statements)

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“…This assumption is consistent with the evidence documented by Mendoza and Terrones (2008), who show that, during credit booms, the debt-to-GDP ratio is moving over time in a procyclical fashion: it is above trend during the output booming phase and falls below trend when output goes bust. This cyclical pattern is more pronounced for emerging countries, as seen from Figures 7 and 10 in Mendoza and Terrones (2008, p. 13).…”

Section: The Modelsupporting

confidence: 91%

“…The model is broadly consistent with those empirical patterns. Last but not least, the formulation of the credit constraint accords with the evidence documented in Mendoza and Terrones (2008), who report that along credit booms, the capital inflows-to-GDP ratio is procyclical. I argue that it is important to incorporate this Pintus International capital flows, debt overhang and volatility feature into the model, as it makes boom-bust and sunspot episodes compatible with reasonable values of the foreign debt-to-GDP ratio.…”

Section: Issue and Main Resultsmentioning

confidence: 64%

“…Although the model is highly stylized, it predicts that foreign borrowing may be detrimental to macroeconomic stability when the debt-to-collateral ratio is procyclical. In view of the evidence documented by Mendoza and Terrones (2008), the implied values for the elasticity parameter γ belong to the upper end of the range of estimates. In other words, an economy relying on international credit markets is likely to be susceptible to boom-bust and sunspot episodes, when the debt-to-capital ratio is procyclical enough.…”

Section: Is Indeterminacy Plausible?mentioning

confidence: 75%

“…The empirical study of Mendoza and Terrones (2008) provides some guidance on the values that could be assigned to the elasticity parameter γ . In a sample of 49 countries over the 1960-2006 period, Mendoza and Terrones (2008) estimate, inter alia, the percentage deviations from trend of both output and the capital inflows-output ratio during a credit boom. In particular, their Figures 7 and 10 show that, for emerging economies, the deviation of D/Y is about 2 (respectively 2/3) times the deviation of Y three years before (respectively after) the credit peak.…”

Section: Is Indeterminacy Plausible?mentioning

confidence: 99%

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International capital flows, debt overhang and volatility

Pintus

2011

International Journal of Economic Theory

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Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract We analyze shareholders' incentives to change the leverage of a firm that has already borrowed substantially. As a result of debt overhang, shareholders have incentives to resist reductions in leverage that make the remaining debt safer. This resistance is present even without any government subsidies of debt, but it is exacerbated by such subsidies. Our analysis is relevant to the debate on bank capital regulation, and complements Admati et al. (2010). In that paper we argued that subsidies that favor debt over equity are the key reason that banks funding costs would be lower if they "economize" on equity. Subsidies come from public funds, and reducing them does not represent a social cost. It is thus irrelevant for assessing regulation. Other arguments made to support claims that "equity is expensive" are flawed. Like reduction in subsidies, the effects of leverage reduction on bank managers or shareholders do not represent a social cost. In fact, we show that debt overhang creates inefficiency, since shareholders would resist recapitalization even when this would increase the combined value of the firm to shareholders and creditors. Moreover, debt overhang creates an "addiction" to leverage through a ratchet effect. In the presence of government guarantees, the inefficiencies of excessive leverage are not fully reflected in banks' borrowing costs. Since banks' high leverage is a source of systemic risks and imposes costs on the public, resistance to leverage reduction leads to social inefficiencies. The main beneficiaries from high leverage may be bank managers. The majority of the banks' shareholders, who hold diversified portfolios and who are part of the public, are likely to be net losers. Our analysis highlights the critical importance of effective capital regulation and high equity requirements, especially for large and "systemic" financial institutions. We analyze shareholders' preferences when choosing among various ways leverage can be reduced. We show that, with homogeneous assets, if the firm's security and asset trades have zero NPV, and the firm has a single class of debt outstanding, then shareholders find it equally undesirable to deleverage through asset sales, pure recapitalization, or asset expansion with new equity. When these conditions are not met, shareholders can have strong preferences for one approach over another. For example, if the firm can buy back junior debt, asset sales are the preferred way to reduce leverag...

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Section: The Modelsupporting

confidence: 91%

Section: Issue and Main Resultsmentioning

confidence: 64%

Section: Is Indeterminacy Plausible?mentioning

confidence: 75%

Section: Is Indeterminacy Plausible?mentioning

confidence: 99%

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International capital flows, debt overhang and volatility

Pintus

2011

International Journal of Economic Theory

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“…This is not the case for developing countries. Instead these are more prone to face credit 20 We tested for Gourinchas et al (2001) and Mendoza and Terrones (2008) criteria using three different thresholds for their computation: 1.5, 1.75 and 2.0. All these results are available upon request.…”

Section: Robustness Checksmentioning

confidence: 99%

Political and Institutional Determinants of Credit Booms

Castro

Martins

2018

Oxf Bull Econ Stat

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The literature that investigates credit booms has essentially focused on their economic determinants. This paper explores the importance of political conditionings and central bank independence and provides some striking findings on this matter. Estimating a fixed effects logit model over a panel of developed and developing countries for the period 1975q1–2016q4, we find that credit booms are less likely when right‐wing parties are in office, especially in developing countries, and when there is political instability. However, they have not proven to depend on the electoral cycle. More independent Central Banks are also found to reduce the probability of credit booms. Moreover, they seem to be more likely to occur and spread within a monetary union.

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Choosing an Exchange Rate Regime

Frankel

2012

Handbook of Exchange Rates

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The single most important aspect of an exchange rate regime is the degree of flexibility. The matter is of course more complicated than a simple choice between fixed exchange rate and floating. One can array exchange rate regimes along a continuum, from most flexible to least, and grouped in three major categories:Floating corner 1. Free float 2. Managed float II. Intermediate regimes 1 3. Target zone or band 4. Basket peg 5. Crawling peg 6. Adjustable peg 1The sequence within intermediate regimes is somewhat arbitrary. For example, if the band is as narrow as 2 1 4 % as in the European Exchange Rate Mechanism or even 1% as under Bretton Woods, then it would properly belong closer to the fixed-rate end of the spectrum. Similarly, if the adjustable peg involved a devaluation or revaluation every time a moderate shock came along, it would properly belong closer to the flexible end of the spectrum.

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An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data

Cited by 398 publications

References 6 publications

International capital flows, debt overhang and volatility

International capital flows, debt overhang and volatility

Political and Institutional Determinants of Credit Booms

Choosing an Exchange Rate Regime

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