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Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies.

Business cycles --- Financial crises --- Crashes, Financial --- Crises, Financial --- Financial crashes --- Financial panics --- Panics (Finance) --- Stock exchange crashes --- Stock market panics --- Crises --- Econometric models. --- Banks and Banking --- Exports and Imports --- Money and Monetary Policy --- Business Fluctuations --- Cycles --- Financial Markets and the Macroeconomy --- Money Supply --- Credit --- Money Multipliers --- International Finance: General --- International Business Cycles --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- International Investment --- Long-term Capital Movements --- Interest Rates: Determination, Term Structure, and Effects --- Monetary economics --- International economics --- Banking --- Credit booms --- Capital inflows --- Bank credit --- Money --- Balance of payments --- Central bank policy rate --- Financial services --- Capital movements --- Banks and banking --- Interest rates --- United States

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The small states of the Asia and Pacific region face unique challenges in raising their growth potential and living standards relative to other small states due to their small populations, geographical isolation and dispersion, narrow export and production bases, exposure to shocks, and heavy reliance on aid. Higher fixed government costs, low access to credit by the private sector, and capacity constraints are also key challenges. The econometric analysis confirms that the Pacific Island Countries (PICs) have underperformed relative to their peers over the last 20 years. Although these countries often face more limited policy tools, policies do matter and can further help build resilience and raise potential growth, as evidenced in the recent business cycle. The Asia and Pacific small states should continue rebuilding buffers and improve the composition of public spending in order to foster inclusive growth. Regional solutions should also continue to be pursued.

States, Small --- Small economies --- Economic conditions. --- Asia --- Banks and Banking --- Exports and Imports --- Macroeconomics --- Demography --- Environmental Economics --- Economic Integration --- Open Economy Macroeconomics --- International Policy Coordination and Transmission --- Economic Growth of Open Economies --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- Aggregate Factor Income Distribution --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Empirical Studies of Trade --- Macroeconomics: Consumption --- Saving --- Wealth --- Demographic Economics: General --- Climate --- Natural Disasters and Their Management --- Global Warming --- Banking --- International economics --- Population & demography --- Climate change --- Income --- Terms of trade --- Government consumption --- Population and demographics --- National accounts --- International trade --- Environment --- Banks and banking --- Economic policy --- nternational cooperation --- Consumption --- Economics --- Population --- Climatic changes --- Marshall Islands, Republic of the --- Nternational cooperation

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We stress test the global economy to extreme climate change-related shocks on large and interconnected economies. Our analysis (i) identifies large and interconnected economies vulnerable to climate change-related shocks; (ii) estimates these economies’ external financing needs-at-risk due to these shocks, and (iii) quantifies the spillovers to the global economy using a global network model. We show that large and interconnected economies vulnerable to climate change could trigger a drain of $1.8 trillion in international reserves (2 percent of 2019’s global GDP). Domestic and multilateral macroeconomic policies can help reduce these global lossess to about $0.8 trillion. The scenario highlights the importance of considering global spillovers when assessing the impact of climate change-related shocks.

United States --- Macroeconomics --- Economics: General --- Environmental Economics --- Natural Disasters --- Finance: General --- Environmental Policy --- International Lending and Debt Problems --- International Finance Forecasting and Simulation --- Open Economy Macroeconomics --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- Globalization: General --- Globalization: Finance --- International Financial Markets --- Financial Forecasting and Simulation --- Climate --- Natural Disasters and Their Management --- Global Warming --- Financial Institutions and Services: Government Policy and Regulation --- Environmental Economics: Government Policy --- Economic & financial crises & disasters --- Economics of specific sectors --- Climate change --- Natural disasters --- Finance --- Environmental policy & protocols --- Environment --- Stress testing --- Financial sector policy and analysis --- Climate policy --- Currency crises --- Informal sector --- Economics --- Climatic changes --- Financial risk management --- Environmental policy

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Regional integration of Pacific Island countries (PICs) with Australia, New Zealand, and emerging Asia has increased over the last two decades. PICs have become more exposed to the region’s business cycles, and spillovers from regional economies are more important for PICs than from advanced economies outside the region. While strong linkages with Asia would help in the event of a global downturn, PICs remain particularly vulnerable to global commodity price shocks. In this paper, we use a Vector Error Correction Model (VECM) for each PIC to gauge the impact of global and regional growth spillovers. The analysis reveals that the impact on PICs’ growth from an adverse oil shock would be substantial, and in some cases even larger than from a negative global demand shock. We also assess the spillovers to the financial sector from the deterioration of the global outlook. PICs should continue to rebuild policy buffers and implement growth-oriented structural reforms to ensure sustained and inclusive growth.

International economic integration. --- Common markets --- Economic integration, International --- Economic union --- Integration, International economic --- Markets, Common --- Union, Economic --- International economic relations --- Islands of the Pacific --- Pacific Islands --- Pacific Ocean Islands --- Economic conditions. --- Banks and Banking --- Budgeting --- Investments: Commodities --- Exports and Imports --- Macroeconomics --- Economic Integration --- Open Economy Macroeconomics --- International Policy Coordination and Transmission --- Economic Growth of Open Economies --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- National Budget --- Budget Systems --- Externalities --- Commodity Markets --- Remittances --- Banking --- Budgeting & financial management --- Investment & securities --- International economics --- Extra-budgetary funds --- Spillovers --- Commodities --- Public financial management (PFM) --- Financial sector policy and analysis --- Balance of payments --- Commercial banks --- Financial institutions --- Banks and banking --- International finance --- Budget --- Commercial products --- Papua New Guinea

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During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.

Monetary policy --- Transmission mechanism (Monetary policy) --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Monetary transmission mechanism --- Islands of the Pacific --- Pacific Islands --- Pacific Ocean Islands --- Economic policy. --- Banks and Banking --- Foreign Exchange --- Inflation --- Money and Monetary Policy --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Price Level --- Deflation --- Currency --- Foreign exchange --- Banking --- Monetary economics --- Macroeconomics --- Conventional peg --- Central bank policy rate --- Exchange rate arrangements --- Credit --- Interest rates --- Prices --- Fiji, Republic of