DP2811 Lending Booms: Latin America and the World

Author(s): Pierre-Olivier Gourinchas , Oscar Landerretche , Rodrigo Valdés

Publication Date: May 2001

Keyword(s): Balance-of-Payment Crises , Banking Crisis , Credit Boom , Lending Boom , Macroeconomic Performance , Latin America

JEL(s): E44 , E51 , F32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2811.asp

Recent theories on the origins of crises put lending booms at the root of financial collapses. Yet lending booms may be a natural consequence of economic development and fluctuations. So, are lending booms dangerous? In this Paper, we investigate this question empirically using a broad sample of lending boom episodes over 40 years, with a special eye on Latin America. Our results indicate that: (1) lending booms are often associated with (i) a domestic investment boom, (ii) an increase in domestic interest rates, (iii) a worsening of the current account, (iv) a decline in reserves, (v) a real appreciation, and (vi) a decline in output growth; (2) lending booms typically do not substantially increase the vulnerability of the banking sector or the balance of payments. On comparing Latin America and the rest of the world, we find that Latin American lending booms make the economy considerably more volatile and vulnerable to financial and balance-of-payment crises than is the case in other regions.