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Iacovos Ioannou

’s current credit cycle relative to the pre-crisis credit boom. By examining stylized facts about financial crises, it assesses whether the current credit cycle poses risks to financial stability. Part III explores in more detail the relationship between credit, housing price, and output cycles. It describes the main features of these cycles in Lithuania and other Baltic and Nordic countries and their comovements within and across countries. Part IV employs panel regressions to assess the determinants of a credit upturn. It examines whether the housing price and output

Iacovos Ioannou
Lithuania’s current credit cycle highlights the strong link between housing prices and credit. We explore this relationship in more detail by analyzing the main features of credit, housing price, and output cycles in Baltic and Nordic countries during1995-2017. We find a high degree of synchronization between Lithuania’s credit and housing price cycles. Panel regressions show a strong correlation between a credit upturn and housing price upturn. Moreover, panel VAR suggests that shocks in housing prices, credit, and output within and outside Lithuania strongly impact Lithuania’s credit.
Iacovos Ioannou

Front Matter Page European Department Contents I. Introduction II. The Current Credit Cycle in Comparison with the Pre-Crisis Boom III. The Main Features and Synchronization of Credit, Housing Price, and Output Cycles IV. Determinants of Credit Upturn V. Assessing the Impact of Domestic and External Shocks on Credit VI. Conclusions References Tables 1. Credit Cycle Characteristics 2. Housing Price Cycle Characteristics 3. Output Cycle Characteristics 4. Lithuania: Credit, Housing Price, and Output Cycles 5. Lithuania

Mr. Stijn Claessens, Majid Malaika, and Mr. Marco Terrones

. House price busts, at 18 quarters or so, last, on average, almost four times longer than garden-variety housing downturns. In contrast, booms in financial markets tend to be shorter than standard upturns. Credit market booms are the shortest, about 4½ quarters, compared with the average duration of other credit upturns of about 9 quarters, while housing booms are often the longest. A boom in housing lasts about 13 quarters. chart 1 Booms and busts Disruptions can last a long time . . . (number of quarters, average) Source: Claessens, Kose, and Terrones

Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens

quarters while house prices take about 14 quarters to recover. Credit upturns are relatively short, on average 8 quarters. Given that a typical recession (or recovery) last about four quarters, our findings suggest that financial cycles are often more protracted than business cycles are. Table 1B. Financial Cycles: Basic Features Downturns Upturns Duration Amplitude Slope Duration Amplitude Slope Credit Full Period 5.50 [4.00] -4.03 [-6.68] -0.93 [-1.25] 8.00 [4.00] 4.36 [6.44] 1.23 [2

Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens
This paper provides a comprehensive analysis of financial cycles using a large database covering 21 advanced countries over the period 1960:1-2007:4. Specifically, we analyze cycles in credit, house prices, and equity prices. We report three main results. First, financial cycles tend to be long and severe, especially those in housing and equity markets. Second, they are highly synchronized within countries, particularly credit and house price cycles. The extent of synchronization of financial cycles across countries is high as well, mainly for credit and equity cycles, and has been increasing over time. Third financial cycles accentuate each other and become magnified, especially during coincident downturns in credit and housing markets. Moreover, globally synchronized downturns tend to be associated with more prolonged and costly episodes, especially for credit and equity cycles. We discuss how these findings can guide future research on various aspects of financial market developments.
Padamja Khandelwal, Ezequiel Cabezon, Mr. Sanan Mirzayev, and Rayah Al-Farah

large credit upturns and downturns. ▪ Credit upturns . Starting in the early 2000s, CCA countries went through a historic credit upturn that lasted an average of 25 quarters, and real credit increased a cumulative seven-fold ( Table 1 ). 6 Starting in the early 2010s, many CCA countries witnessed another strong credit upturn, with an average of 15 uninterrupted quarters of real credit increase. ▪ Credit downturns . There have been 40 credit downturns in CCA countries during 2001–20. Classifying the top 25 percent of downturns as credit busts gives an average

Padamja Khandelwal, Ezequiel Cabezon, Mr. Sanan Mirzayev, and Rayah Al-Farah
Limited economic diversification has made the economies of the Caucasus and Central Asia particularly vulnerable to external shocks. The economies in the region are heavily reliant on oil and mining exports as well as remittances. In some countries, tourism and capital flows also play a prominent role in aggregate economic activity.
Mr. Marco Terrones, Mr. Ayhan Kose, and Mr. Stijn Claessens

Price Downturns 107 5.45 -4.37 -0.93 2.80 4.50 -4.37 -0.29 C. Equity Price Downturns 384 6.38 -28.42 -4.78 3.47 6.18 0.81 -28.42 Equity Price Busts 95 10.95*** -57.72*** -5.56*** 4.40** 10.34* 2.25 -57.72*** Other Equity Price Downturns 289 4.88 -21.50 -4.33 3.41 5.77 0.76 -21.50 Financial Upturns Other Variables Number of Events Duration 1/ Amplitude Slope Output Credit House Price Equity Price A. Credit Upturns 186 10.85 5.59 1

International Monetary Fund. European Dept.

synchronized with those of other Baltic and Nordic countries. This is particularly true for credit due to the close links of Lithuania’s financial system to parent bank developments. Housing price cycles are the least synchronized possibly because real estate markets are mostly affected by local conditions. An econometric exercise shows that housing price booms are the key determinant of credit upturns. Other factors causing a credit upturn include the negative impact of the global financial crisis, bank profitability, deposit growth, interest rates, and private sector