Why are credit booms sometimes sweet and sometimes sour?

This paper investigates the commonalities and differences between benign credit booms and those that end up in banking crises by employing a Multinomial and a Sequential Logit model over a panel of industrial and developing countries. Some economic, political and institutional factors are found to play an important role in understanding the credit booms dynamics. In particular, this study shows that the quantity and price of credit, liquidity in the economy, economic growth, openness of the economy, government orientation, political stability and Central Bank independence are relevant to explain not only the occurrence of credit booms but also – and most importantly – whether they end up in a systemic banking crisis or not. While a better economic environment and Central Bank independence are essential for both industrial and developing countries to avoid credit booms from going badly, political factors seem to exert a stronger influence in developing countries.