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Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil
Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.
Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil

, and monetary policy measures aimed at influencing credit dynamics in response to idiosyncratic shocks. Moreover, Guatemala and to a less extent Costa Rica’s credit cycles are less synchronized with the CAPDR region. In contrast, the El Salvador’s credit cycle is very synchronized with the regional credit cycle, followed by Honduras, Nicaragua and Panama which have synchronicity indexes slightly above 0.5. The credit cycles of the CAPDR countries could also be compared with respect to the amplitude of the credit gaps (similarity). According to this index, Panama