Credit, Output, and Financial Stress

April 5, 2022

Paper | This paper highlights the role of credit performance in shaping economic performance and sheds new light on both the Brazilian boom in the 2000s and the economic contraction since 2015. Its results suggest that an active stance on public credit would have been instrumental in speeding up the economic recovery.

Authors: José Pedro Bastos Neves, Willi Semmler

In this paper, the authors estimate a bi-variate LVSTAR model to investigate the non-linear interplay between Brazil’s credit, output, and financial cycles between 1999 and 2017. They use financial stress as the regime-switching variable to assess how it impacts economic performance. The paper finds evidence of a lengthy transition between regimes. Moreover, Granger Causality tests indicate statistical precedence of credit growth through financial intermediaries. After credit shocks, we find non-mean-reverting trajectories and that financial stress worsens the economic downturn. Counterintuitively, total credit growth increases after adverse output shocks. This appears to be caused by elevated public credit provision relative to private credit flows, triggered by anticyclical policy.


Access the paper via Metroeconomica here.