What drives the duration of credit booms?

Abstract

AbstractThis paper presents a new perspective on the study of credit booms by both examining what determines their duration and testing for relevant political features. The results from the estimation of a discrete‐time duration model show that both the economic and the political environment influence the duration of credit booms. These events are found to last longer when: (a) the economy is growing faster; (b) levels of liquidity in the banking system are lower; (c) current account position deteriorates; (d) centre parties are in office; and (e) with coalitions/minority governments. Evidence of a political cycle in the duration of credit booms is also detected. Additionally, this study shows that credit booms that end up in banking crises last longer but this effect can be offset by a higher degree of Central Bank independence. Hence, a monetary authority that is not influenced by political pressures is essential to prevent the unfolding of credit booms into banking crises.