Appendix 1: Data Set
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Niels-Jakob Harbo Hansen was a summer intern the IMF’s Western Hemisphere Department (Southern 2) and a PhD candidate at Stockholm University (IIES) when this paper was drafted. The authors are grateful to Ulric Erickson von Allmen, Matias Arnal, Luis Cubeddu, Nicolas Magud, Herman Kamil, Alexander Kohlhas, Lev Ratnovski, Ben Sutton, Andrew Swiston, Camilo Tovar and Evridiki Tsounta for stimulating discussions and helpful suggestions. The paper also benefited from comments by participants in IMF’s Western Hemisphere Department seminar. We are also grateful to Stijn Classens and Neeltje van Horen for providing access to their data on foreign banks. Nakul Kapoor is thanked for excellent research assistance and Helen Lyons for superb editorial assistance. The authors retain full responsibility for errors and omissions.
Countries in Latin America included in the analysis are Argentina, Brazil, Bolivia, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Ecuador, Guatemala, Honduras, Nicaragua, Mexico, Panama, Paraguay, Peru, Uruguay and Venezuela.
Some studies have, however, qualified this statement by finding that the positive relationship tends to disappear when (i) financial depth becomes too high, (ii) when institutions quality is poor or (iii) when inflation is excessive (Favara, 2003; Arcand et al., 2012; Demetriades and Law, 2006; Rosseau and Wachtel, 2002).
Notable exceptions are Guatemala, El Salvador, Bolivia, the Dominican Republic and Uruguay, where growth was muted or even negative.
We define total bank funding as deposits, bank equity, bank secturities, banks’ net foreign liabilities. See Annex 1B for a detailed description of the variables.
The development during 2005-2011 is described as data is lacking for 2004-11.
“Productive sectors” are defined as Agriculture, Other Rural Industries, Manufacturing, Mining and Energy Supply.
As per ultimo 2011 71.6 percent of all assets in the banking system in Nicaragua were in foreign currency (IMF, 2012b).
In the analysis below we are using a smoothing parameter (lambda) in the HP-filtering of 400.000. This is what Drehmann et al. (2011) suggest for quarterly data. The relatively high value is motivated by the observation that financial cycles approximately are four times longer than usual business cycles. Moreover, Drehmann et al. (2011) show that this lambda value outperforms alternative lambda values as a banking crisis predictor.
However, in contrast to Borio and Drehmann (2009) and Drehman et al. (2011) the study by IMF (2011a) finds that the change in the credit-to-GDP ratio outperforms the credit-to-GDP gap as a crisis indicator.
Note that in contrast to our findings the Financial System Stability Assessment for Brazil (IMF, 2012b) finds that the credit-to-GDP in Brazil has receded notably since 2009. This cautions against a strong interpretation of the result.
Our dataset does not contain equity prices for Venezuela, Uruguay, Bolivia, the Dominican Republic, Guatemala, Ecuador, Nicaragua, El Salvador, Paraguay, Honduras and Panama.
See Annex 1B for a detailed description of the dataset.
For a discussion of the problems of inclusion of outcome variables see section 3.2.3 in Angrist and Pischke (2009).
The FMOLS and DOLS estimators confirms the estimates delivered by the MGE estimator. Recursive estimation points to parameter stability for deposits to GDP for the sample of middle-income countries except a period from 1988 to 1993, where the estimate temporary increased.
Specifically, the credit level is compared with the credit level implied by model 1 in Table 3 and recalculated country specific constraints.
According to IMFs International Financial Statistics the share of issued securities and net foreign liabilities as share of total funding (deposits, equity, issued securities and net foreign liabilities) has increased from 2004 to 2011 by 3 and 23 percentage points in Chile and Paraguay, respectively. In Colombia the increase started earlier as the share increased by 24 percentage points from 2000 to 2011.
The share of issued securities and net foreign liabilities as share of total funding (deposits, equity, issued securities and net foreign liabilities) in Costa Rica stood at 45 percentage in 2011.
Securities issued by banking sector are borderline significant in Table 4. Stock market capitalization is not included due to a large implied loss of observations.
Constructed by: loans to non-financial corporations (line 22DG in IMF Monetary and Financial Statistics) + loans to households and non-financial corporations (line 22DH) + securities other than shares on non-financial corporations (line 22DL) + securities other than shares on households and non-profit institutions (line 22DM) + shares and other equity on other residents (line 22DF).
Specifically, the following formular is applied: rir=100*(1+(1+i)/(1+pi)-1). Here rir, i and pi are the real interest rate, the nominal interest rate and actual inflation, respectively.