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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

group are: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. The synchronicity and similarity indexes of the CAPDR credit cycle are countercyclical. Synchronicity has increased during contractionary phases and declined during booms over the past 20 years ( Figure 14.3 ). The regionwide credit cycle was more synchronized in 1998, in 2007/08, and again in 2011 and 2012. After a significant drop in 1999, synchronicity slowly increased in the early 2000s, reaching a maximum of 0.94 during the global financial crisis. Similarly, the amplitude of the

Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil

.60 Guatemala 0.39 0.46 Honduras 0.53 0.13 Nicaragua 0.53 -0.37 Panama 0.53 0.71 CAPDR 0.50 0.20 Source: Authors’ estimates. The synchronicity and similarity indexes of the CAPDR credit cycle are countercyclical . Synchronicity increased during contractionary phases of the business cycles, but it declined during booms over the last 20 years ( Figure 3 ). The region-wide credit cycle is more synchronized in 1998 and from 2007 to 2011. After a significant drop in the early 2000, synchronicity slowly increased