Credit market developments and sectoral business cycles worldwide

Abstract

This paper investigates the relationship between credits and sector-level output dynamics in a sample of 41 advanced and developing countries. The existing literature shows that household credits are associated with boom-bust cycles in aggregate output, whereas business loans do not cause such output dynamics. The present paper expands these findings in terms of advanced versus developing countries and manufacturing versus services sectors. The new findings indicate that the resulting boom-bust cycles in the aggregate output in response to household credits are generally observed in the sample of developing countries, with no similar dynamics in the advanced countries. Another significant conclusion is that the boom-bust cycles are generated mostly in the services sector. No equivalent boom-bust dynamics are observed in the manufacturing sector, but the negative medium-run effects of household credits are larger in this sector. These findings indicate that credit mechanisms and consequences can significantly vary across countries and sectors.