Essays on financial stability, credit dynamics and policy challenges

This paper identi es credit booms in 11 Euro Area countries by tracking private loans from the banking sector. The events are associated with both fi nancial crises and specfii c macro fluctuations, but the standard identifi cation through threshold methods does not allow to catch credit booms in real time data. Thus, an early warning model is employed to predict the explosive dynamics of credit through several macro- financial indicators. The model catches a large part of the in-sample events and signals correctly both the global fi nancial crisis and the sovereign debt crisis in an out-of-sample setting by issuing signals in real-time data. Moreover, while tranquil booms are driven by global dynamics, crisis-booms are related to the resilience of domestic banking systems to adverse financial shocks. The results suggest an ex-ante policy intervention can avoid dangerous credit booms by focusing on the solvency of the domestic banking system and financial market's overheating.

Over the last two decades the intensity of credit standards' tightening during economic contractions has exceeded their easing during expansions among euro area banks. This mechanism is fed by the boom-bust cycle of credit that, as much research has shown, is linked to financial instability with large effects on the real economy. We build a small scale nonlinear quadratic (NLQ) model to study how credit feedback can affect the overall adjustment path of the economy towards some steady state, when the central bank solve a infi nite-horizon decision problem where the policy rate is allowed to also be zero or negative. Then, we estimate local projections for a supervisory shock hitting banks' credit standards and propose a new external instrument to identify its dynamic causal impact on the real and fi nancial sector. We find that the regime dependence reveals important information to policy makers to implement macroprudential measures.