Credit Market Imperfections in Middle Income Countries
SCID Working Paper 165
In recent decades, many middle-income countries (MICs) have liberalized their financial markets. Financial liberalization has typically been followed by a lending boom, during which credit has grown unusually fast. Some of these booms have been punctuated by twin currency and banking crises that are followed by a protracted credit crunch. In this paper we document three credit-market imperfections prevalent in MICs that can explain these boom-bust cycles as well as other macroeconomic patterns observed at higher frequencies across MICs. These imperfections are the existence of borrowing constraints (the effects of which differ across sectors), currency mismatch and systemic bailout guarantees.