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GEMF

Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 17 de 2013

   

Duration Dependence and Change-Points in the Likelihood

of Credit Booms Ending


Vítor Castro

Universidade de Coimbra, GEMF e NIPE

Megumi Kubota
The World Bank

Abstract:

Whether the likelihood of a credit boom ending is dependent on its age or not, or whether the respective behavior is smooth or bumpy are important issues to which the economic literature has not given attention yet. This paper tries to fill that gap, exploring those issues with a proper duration analysis. Credit booms are identified considering two criteria well established in the literature: (i) the Mendoza-Terrones criteria and (ii) and the Gourinchas-Valdes-Landarretche criteria. A continuous-time Weibull duration model is employed over a group of 71 countries for the period 1975q1-2010q4 to investigate whether credit booms are duration dependent or not. The findings show that the likelihood of credit booms ending increases over their duration and that these events have become longer over the past decades. In addition, the paper extends the baseline Weibull duration model in order to allow for change-points in the duration dependence parameter. The empirical findings support the presence of a change-point: increasing positive duration dependence is observed in booms that last less than eight to ten quarters, but it becomes decreasing or even irrelevant for longer events. Analogous results are found for those credit boom episodes that are followed by systemic banking crisis (bad credit booms). The findings also show that credit booms are, on average, longer in industrial than in developing countries.

JEL Classification:
C41, E32, E51.

Keywords:
Credit booms, duration analysis, Weibull model, duration dependence, change-points.

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