Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability

By Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, Yizhi Xu

August 20, 2021

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Adolfo Barajas, Woon Gyu Choi, Ken Zhi Gan, Pierre Guérin, Samuel Mann, Manchun Wang, and Yizhi Xu. Loose Financial Conditions, Rising Leverage, and Risks to Macro-Financial Stability, (USA: International Monetary Fund, 2021) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

After a steady increase following the global financial crisis, private nonfinancial sector leverage rose further during the COVID-19 on the back of easy financial conditions induced by unprecedented policy support. We investigate the empirical relationships between increased leverage, financial conditions, and macro-financial stability in a sample of major advanced and emerging market economies. We find that loose financial conditions contribute to leverage buildups and generate an intertemporal tradeoff: financial stability risk is lessened in the near term but exacerbated in the medium term. The tradeoff is amplified during credit booms, when debt service burdens are particularly high, or when the share of foreign currency debt is high in emerging markets. Selected macroprudential tools can arrest leverage buildups and mitigate the tradeoff.

Subject: Central bank policy rate, Credit booms, Financial sector policy and analysis, Financial sector stability, Financial services, Macroprudential policy, Macroprudential policy instruments, Money

Keywords: A. Macroprudential policy, B. Macroprudential policy, Central bank policy rate, Credit booms, Financial sector stability, Global, Leverage buildup, Loose financial conditions, Macroprudential policy, Macroprudential policy instruments, Policy implication

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/222
Stock No:

WPIEA2021222
ISBN:

9781513591483
ISSN:

1018-5941

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