Determinants of Credit Growth: Macroprudential Policy and Inflation
Determinants of Credit Growth: Macroprudential Policy and Inflation

Summary/Abstract: The aim of the paper is to examine the relation between the domestic credit instability and the rate of inflation. Using random-effects panel logistic regression on annual data for a sample of around 160 countries over up to four decades we show that low inflation makes sizable deviations of the credit-to-GDP ratio from the trend more likely, thereby posing a dilemma for the central bank’s choice of policy goals. We find that macroprudential policies are counterproductive as they do not reduce the probability of surpassing the credit-to-GDP gap threshold of 2 and increase the probability of hitting the upper threshold of 10 in advanced economies. The use of financial institutions-targeted instruments seems to tighten the link between credit and output gaps in advanced economies

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