Buncic, DanielMelecky, Martin2013-04-112013-04-112013-02https://hdl.handle.net/10986/13151Equilibrium credit is an important concept because it helps identify excessive credit provision. This paper proposes a two-stage approach to determine equilibrium credit. It uses two stages to study changes in the demand for credit due to varying levels of economic, financial and institutional development of a country. Using a panel of high and middle-income countries over the period 1980-2010, this paper provides empirical evidence that the credit-to-GDP ratio is inappropriate to measure equilibrium credit. The reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development. The main drivers of this heterogeneity are financial depth, access to financial services, use of capital markets, efficiency and funding of domestic banks, central bank independence, the degree of supervisory integration, and experience of a financial crisis. Countries in Europe and Central Asia show a slower adjustment of credit to its long-run equilibrium compared with other regions of the world.en-USCC BY 3.0 IGOABSOLUTE VALUEACCESS TO CREDITACCESS TO FINANCEACCESS TO FINANCIAL SERVICESADVANCED ECONOMIESARIMAASSET PRICEASSET PRICESASSETSBANK BRANCHESBANK CREDITBANKING SUPERVISIONBENCHMARKBORROWINGBORROWING COSTSBUFFERBUSINESS CYCLECAPITAL INFLOWSCAPITAL MARKETCAPITAL MARKETSCENTRAL BANKCENTRAL BANK INDEPENDENCECENTRAL BANKSCONSUMER PRICE INFLATIONCONSUMERSCORRELATION COEFFICIENTCOST EFFECTIVENESSCOST OF CREDITCOVARIANCE MATRIXCREDIT AVAILABILITYCREDIT GROWTHCREDIT NEEDSCREDIT PROVISIONCREDIT REQUIREMENTSCURRENCY UNITSDEBTDEBT SECURITIESDEFLATIONDEMAND FOR CREDITDEPENDENT VARIABLEDEPENDENT VARIABLESDEPOSITDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDISEQUILIBRIUMDISTORTIONSDIVERSIFICATIONDOMESTIC BANKSDOMESTIC CAPITALDOMESTIC CAPITAL MARKETDOMESTIC CURRENCYDOMESTIC DEBTDOMESTIC DEBT MARKETSDOMESTIC INTEREST RATEECONOMETRIC MODELECONOMIC ACTIVITYECONOMIC DEVELOPMENTECONOMIC GROWTHECONOMIC THEORYECONOMIC TRANSACTIONSECONOMICS LITERATUREELASTICITYEMERGING MARKETEMERGING MARKET ECONOMIESEQUILIBRIUMEQUILIBRIUM CREDITEQUILIBRIUM LEVELERROR CORRECTION TERMEXCHANGE RATEEXCLUSIONEXPLANATORY VARIABLESFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL ^ DEPTHFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEEPENINGFINANCIAL DEPTHFINANCIAL DEVELOPMENTFINANCIAL INSTITUTIONSFINANCIAL LIBERALIZATIONFINANCIAL MARKETSFINANCIAL PORTFOLIOSFINANCIAL RISKSFINANCIAL SECTORFINANCIAL SECTOR DEVELOPMENTFINANCIAL STABILITYFINANCIAL STRUCTUREFINANCIAL SYSTEMFINANCIAL TRANSACTIONSFINANCING NEEDSFOREIGN CURRENCYFOREIGN INTERESTFOREIGN INTEREST RATEFULL EMPLOYMENTFUTURE RESEARCHGDPGDP DEFLATORGDP PER CAPITAGREATER ACCESSINCOMEINCOME ELASTICITYINDEPENDENT MONETARY POLICYINDICATOR VARIABLEINFLATIONINFLATION RATEINSTITUTIONAL DEVELOPMENTINSURANCEINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL BORROWINGINTERNATIONAL FINANCIAL STATISTICSINTERPOLATIONINVESTMENT DIVERSIFICATIONLACK OF CREDITLEVELS OF ACCESSLEVELS OF CREDITLOCAL CURRENCYLONG-RUN EQUILIBRIUMMACROECONOMICSMAJOR CURRENCIESMARKET ECONOMIESMIDDLE INCOME COUNTRIESMONETARY POLICYMONEY DEMANDMORAL HAZARDNOMINAL EXCHANGE RATEOPEN ECONOMIESOPEN ECONOMYPORTFOLIOPORTFOLIO DIVERSIFICATIONPOSITIVE COEFFICIENTPRICE CHANGESPRICE ELASTICITIESPRICE ELASTICITYPRICE STABILITYPRIVATE CREDITPRIVATE DEBTPRIVATE SECTOR CREDITPROVISION OF CREDITPRUDENTIAL SUPERVISIONQUANTITY THEORY OF MONEYRANDOM VARIABLEREAL ^ INTERESTREAL ^ INTEREST RATEREAL EXCHANGE RATESREAL GDPREAL INCOMEREAL INTERESTREAL INTEREST RATEREGULATORY FRAMEWORKREJECTIONRETURNRETURNSRISK TAKINGRISK WEIGHTED ASSETSSAVINGSSAVINGS DEPOSITSSCATTER PLOTSERIAL CORRELATIONSHARE OF CREDITSPEED OF ADJUSTMENTSPEEDY ADJUSTMENTSSTABLE ECONOMIC GROWTHSTATISTICAL ESTIMATIONSUPPLY OF CREDITSUPPLY SIDETRANSACTIONVELOCITY OF MONEYWEALTHWEALTH EFFECTWEIGHTSWORLD INTEREST RATEWorld Bank10.1596/1813-9450-6358