Money and credit overhang in the euro area

Abstract

In this paper, we employ panel co-integration techniques to identify and estimate homogeneous long-run equilibrium relations for money and credit for 10 euro area countries. Over the period 1999-2013, we do find evidence of such long-run relations when accounting for a structural break in 2008. While money and credit follow similar long run trends, the short and medium term relation between money and credit overhang is weak, throwing doubt on the hypothesis that money creating potential drives credit booms. Especially in current account deficit countries, we observe a sizable build-up of credit overhang prior to 2008. Positive (negative) credit overhang is strongly related to net foreign borrowing (lending).

Money and credit during normal times and house price booms: evidence from time-frequency analysis

“…Cross-border capital inflows and outflows can directly affect domestic credit beyond the volume that would result from domestic monetary conditions. Indeed, a meaningful credit build-up can appear without sizeable money overhang and vice versa as found by Liu and Kool (2018) for the euro area countries. The authors show that net foreign credit may create a wedge between money and bank credit especially if a current account deficit is present.…”

The Interconnectedness of Stock Prices, Money, and Credit Across Time and Frequency From 1970 to 2016

“…Despite it, typically during financial crises, money and credit diverge -therefore it is justified to analyse credit and money dynamics separately under some circumstances. For example, Liu and Kool (2018) document that the short and medium term relationship between money and credit overhang is fragile in the euro area. Generally, we can observe a considerable increase in credit relative to money in the second half of the twentieth century (Schularick & Taylor, 2012).…”

“…Moreover, the relationship between money and credit differs between: a) Commonwealth Countries, b) Denmark and Switzerland, c) Scandinavian countries and the United States (Ryczkowski, 2020b). Although in recent years a few empirical papers of Carvalho (2019), Ryczkowski (2020b), Liu and Kool (2018) faced the issue of money-credit nexus, the growing wedge between money and credit in some countries and its consequences for the monetary policy are still largely unrecognized. Meanwhile the existence, causation and stability of a relation between money and credit has deep consequences for policy (Goodhart et al, 2016).…”

Money and inflation in inflation-targeting regimes – new evidence from time–frequency analysis

“…The two-way influence of globalization on prices might explain the globalization-inflation "puzzle" (Temple, 2002) and can impede the extraction of the stable link between money growth and inflation. Moreover, in a globalized world, cross-border capital inflows and outflows might affect domestic credit beyond the volume that would result from domestic monetary conditions (Liu & Kool, 2018).…”