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The Riskiness of Credit Allocation and Financial Stability
Author:
Mr. Luis Brandao Marques null

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Qianying Chen null

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Claudio Raddatz null

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Mr. Jerome Vandenbussche
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Peichu Xie null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 207
Language:
English
Publication Date:
27 Sep 2019
DOI:
https://doi.org/10.5089/9781513513775.001
ISBN:
9781513513775
ISSN:
1018-5941
Pages:
39
Keywords:
WP; credit allocation; real GDP; Corporate debt; credit risk; financial leverage; financial vulnerability; financial crises; macro-financial stability; credit expansion; IFS credit data; countercyclical credit policy; credit spread; supply shift; credit quality; credit series; credit boom dummy; credit-to-GDP ratio; Credit; Financial conditions index; Credit booms; Bank credit; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes. Using firm-level data for 55 countries over 1991-2016, we show that the riskiness of credit allocation, captured by Greenwood and Hanson (2013)’s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead. Our analysis indicates that the riskiness of credit allocation is both a measure of corporate vulnerability and of investor sentiment. Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund