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Q: Asset Prices and Credit Growth ( No Answer,   0 Comments )
Subject: Asset Prices and Credit Growth
Category: Business and Money > Economics
Asked by: tassetee-ga
List Price: $10.00
Posted: 07 Aug 2006 03:21 PDT
Expires: 01 Sep 2006 00:09 PDT
Question ID: 753339
What is the causality of asset price volatility/growth and credit growth?

Clarification of Question by tassetee-ga on 08 Aug 2006 13:24 PDT
To further clarify my problem: Borio and Lowe found in an article of
2002 named "Asset prices, financial and monetary stability: exploring
the nexus", that there exists a correlation between asset price growth
and credit growth, and that these two together lead to financial

However this means only, that they may occur hand-in-hand, not that
one causes the other. I want to know, through which mechanism the
growth of the one can or does cause the growth of the other. (OK, I
guess I just messed this up a bit more... sorry)
There is no answer at this time.

The following answer was rejected by the asker (they reposted the question).
Subject: Re: Asset Prices and Credit Growth
Answered By: guillermo-ga on 08 Aug 2006 15:19 PDT
Hello Tassetee-ga,

The following documents, from very authoritative sources, seem to
cover the two issues you asked about.

In the document "Remarks by Vice Chairman Roger W. Ferguson, Jr. to
the Banco de Mexico International Conference, Mexico City, Mexico;
November 15, 2005; 'Asset Price Levels and Volatility: Causes and
Implications'", findable at the Federal Reserve website
), are exposed the causes for volatility:

(In order to respect copyrights, I've quoted just a few excerpts that
covers the basics of your question -- you will find deeper
explanations reading the full text linked above.)

"Asset price volatility can be decomposed into two pieces--one that
depends on the volatility of future cash flows and one that depends on
the volatility of the discount rate applied to those cash flows
(dividends or earnings) (...) Research has suggested that the
variation in dividends or earnings accounts for no more than
one-fourth of stock market volatility, whereas variation in the
discount rate accounts for the bulk of the volatility."

"(...) the volatility of investors' forecasts of future corporate
earnings or dividends has declined substantially, which would tend to
lower the volatility of stock prices (...) (but) the volatility of the
discount rate, which historically has been the main driver of stock
market volatility, has not declined. (...) Another reason why the
volatility of discount rates may not have fallen is that investors
learn only gradually about changes in macro volatility and thus have
greater uncertainty about the current volatility regime.
Alternatively, investors may fear that volatility will revert back to
a higher level in the future."


"The microeconomic factor I want to focus on is the greater effect of
market liquidity on asset prices. (...) As liquidity has grown, some
of the volatility we have seen in asset prices may be related to
shifts in market liquidity. Some believe that liquidity may now be a
more significant factor in three particular areas: financial
innovations that enable a wider range of risks to be traded, the
trading behavior of large investors, and the growing role of hedge


"Some people have argued, however, that because these financial
innovations rely on market liquidity, they impose costs by increasing
asset price volatility when demands for liquidity are unusually high."

Causes of credit growth, according to the document "Assessing and
Managing Rapid Credit Growth"; by ?nci Ötkertker-Robe (International
Monetary Fund - Monetary and Financial Systems Department;
WB/IMF/Federal Reserve System Seminar for Senior WB/IMF/Federal
Reserve System Seminar Bank Supervisors from Emerging Economies;
October 19, 2005 -$FILE/K+-+Otker+-+Rapid+Credit+Growth.pdf

(In order to keep safe about copyright issues, I will restrict myself
to mentions the causes as listed in the document -- to read the
correspounding details please go directly to the document linked
above; thanks for your understanding.)

"Financial deepening"
"Normal cyclical upturns"
"Financial accelerator models"
"Risk may be underestimated during booms, overestimated in recessions"
"Incentive structures"
"Accounting/regulatory frameworks"
"Market distortions"
"Mere quantity/speed of loan applications"

Search strategies:
"asset price volatility" causes
"causes of credit growth"

As expressed in the beginning, I believe that the information posted
should match you expectations. However, please feel free to let me
know if you consider any clarification necessary. Thanks for your



Request for Answer Clarification by tassetee-ga on 09 Aug 2006 01:35 PDT
Hey guillermo,

thank you very much for your research, unfortunately that was not the
thing I was looking for. I did not want the "cause", but rather the
"causality" between the two, i.e. how either asset prices are being
affected by credits or the other way round.

If you have some documents in queue, that would be great. Besides, I
will delve into that IMF report.

Thanks, tassetee

Clarification of Answer by guillermo-ga on 09 Aug 2006 09:46 PDT
Hi Tassetee,

I understand what you really need -- your clarification to the
question expressed it well too. It seems I was already working on the
answer when you posted it, so I failed to see it before. Anyway, I'll
try to find what you're focusing in. I'll keep you updated.



Clarification of Answer by guillermo-ga on 15 Aug 2006 20:54 PDT
Hello Tassetee,

The following articles adress the issue of the interrelations between
asset prices and credit growth, in different contexts and from diverse
perspectives. While there are mentions of intercausality, none of
them, to my understanding, stated conclusively that there is always a
causal relationship -- at least, that may differ with each scenario. I
posted a few sample excerpts from each article, but I would suggest
you to explore them more deeply -- hopefully you'll find in them what
you're looking for:

Flexible inflation targeting and financial stability: Is it enough to
respond to output? (

"Arguably, a modest tightening or easing of monetary policy when asset
prices rise above or below sustainable levels may help smoothing
fluctuations credit growth, output and inflation. Such moves may also
reduce the possibility of an asset price bubble forming in the first
"It is possible that a stable credit growth can contribute to reign in
movements in asset prices as well as consumption and investment and
thereby promote economic stability in general, and financial stability
in particular."
"...a rise in housing prices affects output directly due to the wealth
effect and thereby inflation (...) it leads to higher credit growth
which contributes to a further increase in especially housing prices
and thereby in aggregate demand, unemployment and inflation. (...) an
interest rate response to housing prices contributes not only to
stable housing prices but also to stable credit growth and output as
well as inflation."

What drives housing price dynamics: cross-country
evidence ( )

"the feedback from house prices to credit growth is stronger in the
case of countries with more market-sensitive valuation methods for
mortgage accounting. This suggests that prudential rules may have an
impact on the co-movement between residential real estate prices and
the performance of the financial system."
"We also conjecture that the relatively closer link between
innovations in credit growth and housing prices for the second group
of countries is also a factor that explains the greater responsiveness
of the latter to interest rate movements."

Article "Is the Dutch economy overheating?", at De Nederlandsche Bank
Quarterly Bulletin; September 2000
( )

"asset prices and credit growth can also play a major part in the
process of overheating. Sharply rising asset prices, which are not
justified by fundamental developments, are a sign of excessive demand
and, through wealth effects, may in turn lead to extra spending, so
exacerbating existing imbalances. This impact on spending is reflected
in a drop in savings and higher lending to households. While these
higher debts are indeed offset by greater assets, the value of these
assets could be distorted if it emerges that their price has risen far
above their fundamental value. A possible substantial price correction
could cause payment difficulties and also lead to negative wealth
effects and hence lower spending. This downward effect on the real
economy could be intensified if the fall in prices also has a negative
influence on confidence."
"As indicated earlier, the steep rise in asset prices can be both a
contributory factor and a symptom of overheating. Asset prices in the
Netherlands have soared in recent years. From 1996 to 1999, equity
prices on the Amsterdam stock exchange rose by an average of almost
30% annually (...), while, in the same period, house prices went up by
around 13% a year on average. It should be noted that the surge in
equity prices over the past years is not a specifically Dutch
phenomenon, but occurred in many European countries. In contrast, the
situation in the housing market is far more exceptional. While the
growth in equity prices weakened in the first half of 2000, house
prices accelerated by an annual rate of 20-25% (...). At present,
house prices in real terms are even higher than during the peak in the
late 1970s.

"The recent surge in asset prices, especially house prices, has had a
clear positive impact through wealth effects on consumer spending, and
consequently on gdp-growth. The extra spending was evidently financed
through mortgage loans (...). The boom in the housing market induced
vast numbers of households to realise the surplus value of their
homes. According to the Bank?s calculations, these effects had an
upward impact of 0.6 to 0.7 percentage point on real gdp-growth last
year. In comparison, wealth effects in the Netherlands ensuing from
the rise in equity prices have remained marginal so far. This is
mainly because home ownership is more evenly distributed than
equities, which are largely held by institutional investors. The
increased stock ownership by private individuals in recent years may
have somewhat intensified the wealth effects."

Article "How to Identify Asset Price Bubbles?" By Prof. Axel A. Weber,
President of the Deutsche Bundesbank; at Börsen-Zeitung; 2005

"It is also important to look at the broader environment in which
asset price increases take place. Bubbles develop more easily in
situations of ample liquidity and easy credit. An investigation of
monetary and credit aggregates is therefore essential for the
detection of a bubble. However, the relationship between bubbles and
money or credit is not a straightforward one. A positive correlation
could be due not just to credit-financed purchases of assets, but also
to easier access to credit caused by higher collateral values due to
higher asset prices. A third possibility, of course, is that asset
prices and credit growth are not directly related to each other but
driven by a third factor, for example, the expectation of higher
returns on investments."
Reason this answer was rejected by tassetee-ga:
It seems that the researcher's mother tongue isn't English (neither is
it mine, but still). S/He searched for the "cause" of my requested
terms, however I wanted to know the "causality" between the terms. I
clearly stated what I wanted, however s/he started searching without
thoroughly reading my question. It is a very interesting question,
thus I'd be glad if the question was being reposted again.

There are no comments at this time.

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