Do Credit Booms, Financial and Credit Cycles Affect Activity in the Manufacturing Sector?

Abstract

Do credit booms, financial and credit cycles affect activity in the manufacturing sector? Between 2005Q1 and 2008Q3, credit growth, commodity price growth and nominal house price growth were in a boom period. The boom in nominal house price growth had preceded that of credit growth and other financial variables as it started in 2002. The results indicate that the manufacturing sector output growth, employment growth, investment growth, labour participation, labour absorption and labour productivity growth also increase due to positive shocks to credit growth booms, nominal house price booms and commodity price booms. The historical decompositions of positive credit growth, commodity price growth and nominal house price booms shocks on the manufacturing sector output growth and employment growth show that these shocks made positive contributions to the manufacturing sector output growth and employment growth for a large part of the period between 2005Q1 and 2008Q3. The fact that the results in this chapter show that the credit growth boom made the most persistent positive contributions to the manufacturing sector output growth and employment growth implies that the sectoral allocation of credit matters. These results concur with the findings that there is a case for a sectoral countercyclical capital buffer especially to increase the financial sector’s resilience to shocks and reduce credit growth procyclicality.