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Determination of the Current Phase of the Credit Cycle in Emerging Markets

Author

Listed:
  • Elena Deryugina

    (Bank of Russia)

  • Alexey Ponomarenko

    (Bank of Russia)

Abstract
We test the ability of early warning indicators that appear in the literature to predict credit cycle peaks in a cross-section of emerging markets, verifying our findings by cross-sectional validation. Our results confirm that the standard credit gap indicator performs satisfactorily. In fact, we find that, in emerging market economies, it seems rather difficult to outperform this indicator by means of augmented multivariate models. Nevertheless, we have found that the robustness of real-time credit cycle determination may potentially be improved (although with a risk of overfitting the data) by simultaneously monitoring GDP growth, banks’ non-core liabilities, the financial sector's value added and (to a lesser extent) the change in the debt service ratio.

Suggested Citation

  • Elena Deryugina & Alexey Ponomarenko, 2019. "Determination of the Current Phase of the Credit Cycle in Emerging Markets," Russian Journal of Money and Finance, Bank of Russia, vol. 78(2), pages 28-42, June.
    • Handle: RePEc:bkr:journl:v:78:y:2019:i:2:p:28-42
    DOI: 10.31477/rjmf.201902.28
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    References listed on IDEAS

    as
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    2. Drehmann, Mathias & Juselius, Mikael, 2014. "Evaluating early warning indicators of banking crises: Satisfying policy requirements," International Journal of Forecasting, Elsevier, vol. 30(3), pages 759-780.
    3. Enrique G. Mendoza & Marco E. Terrones, 2014. "An Anatomy of Credit Booms and their Demise," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 6, pages 165-204, Central Bank of Chile.
    4. Mr. Bas B. Bakker & Mr. Giovanni Dell'Ariccia & Mr. Luc Laeven & Mr. Jerome Vandenbussche & Ms. Deniz O Igan & Mr. Hui Tong, 2012. "Policies for Macrofinancial Stability: How to Deal with Credit Booms," IMF Staff Discussion Notes 2012/006, International Monetary Fund.
    5. Detken, Carsten & Weeken, Olaf & Alessi, Lucia & Bonfim, Diana & Boucinha, Miguel & Castro, Christian & Frontczak, Sebastian & Giordana, Gaston & Giese, Julia & Wildmann, Nadya & Kakes, Jan & Klaus, B, 2014. "Operationalising the countercyclical capital buffer: indicator selection, threshold identification and calibration options," ESRB Occasional Paper Series 5, European Systemic Risk Board.
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    17. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
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    20. Aastveit, Knut Are & Jore, Anne Sofie & Ravazzolo, Francesco, 2016. "Identification and real-time forecasting of Norwegian business cycles," International Journal of Forecasting, Elsevier, vol. 32(2), pages 283-292.
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    Cited by:

    1. Deryugina, Elena & Ponomarenko, Alexey & Rozhkova, Anna, 2020. "When are credit gap estimates reliable?," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 221-238.
    2. Marcin Pietrzak, 2021. "Can Financial Soundness Indicators Help Predict Financial Sector Distress?," IMF Working Papers 2021/197, International Monetary Fund.

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    More about this item

    Keywords

    credit cycle; countercyclical capital buffers; early warning indicators; emerging markets;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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