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Credit and business cycles’ relationship: evidence from Spain

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Abstract

This study provides evidence on the interaction between business and credit cycles in Spain during the period 1970–2014. The paper works on three analyses: the cycle turning points are identified; the main features of credit and business cycles are documented; and in both cycles the causal relationship is assessed. We find differences in the features of the business and credit cycle phases, which lead to a scant degree of synchronization over time. The lack of synchronization might be a sign that the cyclic interaction could be non-contemporaneous. Our results reveal that there is causation. A significant lagged relationship between business and credit cycles is found; specifically, fluctuations of the business cycle lead fluctuations of the credit to non-financial corporations and a lag exists with respect to the fluctuations of the credit to households. We also examine episodes of credit boom and credit crunch. In the period 1970–2014, Spanish credit booms did not involve deeper business cycle contractions and credit crunches were not associated with deeper and longer business cycle contractions. These differences are related with the great importance of the real estate sector in Spain.

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Notes

  1. Schularick and Taylor (2012) summarise the historical context of business and credit cycles.

  2. Schularick and Taylor (2012) show that Spain reached a state of financial catch-up in the 1870–1939 period relative to the main developed countries and achieved subsequent rapid credit growth in the pre-Second World War period. In the post-war period, both ratios increased, as in the rest of the developed countries.

  3. In 1985, debt securities accounted for almost 10 % of the Spanish financial assets, in 2005 they had reached 35 % and with the crisis they decreased to about 19 %.

  4. As the authors acknowledge, their findings contrast with those of other studies on this subject. In this sense, the study provides an accurate review of the related literature.

  5. The series data of the households include non-profit institutions serving households (NPISHs).

  6. De la Fuente (2012) draws up a linked series of Spanish employment and GDP for the period 1955–2010.

  7. The ‘classical business cycle’, on the basis of the National Bureau of Economic Research (NBER), focuses on changes in the levels of economic activity. An alternative methodology to the ‘classical business cycle’ is the ‘growth cycle’, which can be approximated by analysing the ‘growth rates’ or the ‘deviation cycle’. Many authors recommend studying cycles by means of the ‘growth cycle’ and demonstrate its advantages; see for example Niemira and Klein (1994) or Diebold and Rudebusch (1999).

  8. The turning points identified are robust to changes in the censoring rules. A robustness analysis can be found in the Appendix.

  9. A review of the banking crisis in Spain during the period 1977–2012 is available in Ontiveiros and Valero (2013).

  10. Peydró (2013) identifies several factors that explain the excessive credit boom and lending standards’ deterioration in the Spanish real estate market before this crisis.

  11. The average business cycle contraction lasts about 11 quarters, which might suggest that Spanish contractions are very long. However, this result fits with other studies which provide a chronology of business cycle turning points for Spain. See, for instance, Bengoechea et al. (2002), Camacho et al. (2008), Álvarez and Cabrero (2010b) or Bergé and Jordà (2013).

  12. By including five lags of the growth in the CT, we follow Schularick and Taylor (2012) and Aikman et al. (2015). As Schularick and Taylor suggest, credit booms last for many years, so they must be considered a medium-term phenomenon.

  13. There are other possibilities to define a credit boom. For instance, Dell’Ariccia et al. (2012) and Laeven and Valencia (2012) define credit boom years as those during which the deviation of the credit-to-GDP ratio relative to its trend is greater than 1.5 times its historical standard deviation and its annual growth rate exceeds 10 % or years during which the annual growth rate of the credit-to-GDP ratio exceeds 20 %.

  14. We can highlight, among others, Bernanke and Gertler (1989), Kiyotaki and Moore (1997), Bernanke et al. (1999) and Hammersland and Bolstad (2011).

  15. In Xu (2012), we can find a review of the literature on financial frictions and their impact on the real economy.

  16. The two-way relationship is one of the most important outcomes; however, we can find papers that provide different empirical evidence. For instance, Gordon and He (2008) argue that there is no relationship between the financial cycle and the business cycle. Arcand et al. (2012) find a threshold above which financial development has a negative effect on output growth. Samargandi et al. (2014) conclude that financial development and economic growth are not linearly related (inverted U-shape relationship). Furthermore, Hook and Singh (2014) provide an excellent summary of papers that defend such a non-monotonic relationship between finance and growth.

  17. Doménech et al. (2014) describe the role played by the reasons that we highlight below in the evolution of bank financing to Spanish corporations before, during and at the end of the 2007 crisis.

  18. Jiménez and Saurina (2006) find this behaviour in the granting of credit in Spain since the 1980s, when the Spanish financial liberalisation process began to strengthen. Banks have tended to expand credit without looking at the risk hedging.

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Authors and Affiliations

  1. Departament d’Economia Aplicada, Universitat de Lleida, Carrer de Jaume II, 73. Campus Cappont, 25001, Lleida, Spain

    Mercè Sala-Rios, Teresa Torres-Solé & Mariona Farré-Perdiguer

  2. Department of Applied Economics, University of Lleida, Lleida, Spain

    Mercè Sala-Rios, Teresa Torres-Solé & Mariona Farré-Perdiguer

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  1. Mercè Sala-Rios
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  2. Teresa Torres-Solé
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  3. Mariona Farré-Perdiguer
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Correspondence to Mercè Sala-Rios.

Appendix. Turning points robustness check

Appendix. Turning points robustness check

One might wonder about the extent to which the cycles identified are sensitive to the methodology used and, in particular, to the censoring rules established in relation to the duration of the phases and cycles. We carry out a robustness check to examine this sensitivity of the results. We calculate the turning points, softening the constraints to the fullest extent allowed by the BUSY programme. In particular, we calculate the turning points according to the censoring rules reported in Table 12.

Table 12 Softened rules to implement BUSY
Full size table

The turning points calculated under the constraints of each row of Table 12 are identical to those reported in Table 1. The censoring rules imposed by the methodology do not affect the results; thus, we conclude that the nature of the results is robust.

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Sala-Rios, M., Torres-Solé, T. & Farré-Perdiguer, M. Credit and business cycles’ relationship: evidence from Spain. Port Econ J 15, 149–171 (2016). https://doi.org/10.1007/s10258-016-0124-7

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