Economic and political drivers of the duration of credit booms

This paper presents a new perspective on the study of credit booms by examining what determines their duration and by testing for relevant political features. The results from the estimation of a discrete-time duration model show that not only economic factors but also political dynamics play an important role in explaining the duration of credit booms. These are found to last longer when the economy is both growing faster and exhibits lower levels of liquidity in the banking system; but credit booms tend to be shorter when countries improve their current account position. Furthermore, their duration is affected by the electoral cycle as well as when centre parties are in office. Credit expansions that end in a banking crisis are also found to be statistically longer and their duration more sensitive to economic and political factors. Finally, we find strong evidence that Central Bank independence and the length of credit booms are inversely related.This work was carried out within the funding with COMPETE reference nº POCI-01-0145-FEDER-006683 (UID/ECO/03182/2013), with the FCT/MEC’s (Fundação para a Ciência e a Tecnologia, I.P.) financial support through national funding and by the ERDF through the Operational Programme on "Competitiveness and Internationalization – COMPETE 2020 under the PT2020 Partnership Agreement.