What Is The Role Of Credit And Credit Booms?

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The paper concludes the importance of credit to GDP gap, gross external debt to export, and stocks as variables that can be used in crisis prediction. However, it is the two variables of credit and debt that stand out to be the most relevant, whereas, it could be inferred that stocks are merely augmented by their presence or can be used in the presence of credit and debt. Thus, The probability of a financial crisis incidence in the list of candidate countries increases when the share of domestic loans in GDP is growing, stock prices are increasing, and the gross external debt relative to export is rising.

Historical evidence suggests that credit has a constructive role to play in central bank policy and through modern history; financial
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It is possible to miss valuable information about macroeconomics and financial stability if policymakers continue to choose to ignore the behavior of credit aggregates. However, it is unclear from this study how this information is included in the overall policymaking and regulatory framework, and via which financial instruments. In terms of policymaking and research, it is safe to assert that credit aggregates contain valuable information about the likelihood of future financial crises. However, It is not proven to be a perfect predictor, and this is emphasized by the fact that, in some periods, especially in eras of financial expansion, development and innovation, credit expands to support real economic growth. It is important to keep in mind that at the same time, historical records show that the recurrent occurrence of financial instability and fragility have more often than not been the result of credit booms gone bad.
There has been a slow growth trajectory noted all over the world since the latest crisis, and one of the key and largely overlooked reasons for this disappointing growth is the increasing global burden of debt. Although it is true that low government debt has its benefits and both private and government debt matter, the main focus should now be on reducing private debt as it is larger than public debt and has the larger and more direct impact on economic outcomes, and addressing the issues associated with private debt is necessary
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