Discussion Paper

No. 2011-12 | May 19, 2011
Credit Conditions Indices: Controlling for Regime Shifts in the Norwegian Credit Market

Abstract

The interaction between financial markets and the macroeconomy can be strongly affected by changes in credit market regulations. In order to take account of these effects the authors control explicitly for regime shifts in a system of debt equations for Norway using a common, flexible trend. The estimated shape of the trend matches the qualitative development in the regulations, and the authors argue that it can be viewed as a measure of relative credit availability, or credit conditions, for the period 1975–2008—a credit conditions index (CCI). This entails years of strict credit market regulations in the 1970s, its gradual deregulation in the 1980s, followed by a full-blown banking crisis in the years around 1990 and the development thereafter up to the advent of the current financial crisis. Our study is inspired by Fernandez-Corugedo and Muellbauer (2006), which introduced the methodology and provided estimates of a CCI for the UK. The trend conditions on a priori knowledge about changes in the Norwegian regulatory system, as documented in Krogh (2010b), and it shows robustness when estimated recursively.

JEL Classification

E44 G21 G28

Cite As

Eilev S. Jansen and Tord S.H. Krogh (2011). Credit Conditions Indices: Controlling for Regime Shifts in the Norwegian Credit Market. Economics Discussion Papers, No 2011-12, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2011-12

Assessment



Comments and Questions


Anonymous - Referee Report 1
July 28, 2011 - 14:55

See attached file


Tord Krogh - Reply to referee #1
August 31, 2011 - 09:59

See attached pdf.


Anonymous - Referee Report 2
November 11, 2011 - 08:38

see attached file


Tord Krogh - Reply to referee #2
November 28, 2011 - 16:36

See attached pdf.