This thesis investigates a credit boom in Azerbaijan in 2008 year. I also employ VECM to my model to figure out long-run and short-run dynamics and equilibrium level of credit. This paper also studies macroeconomic implications of high credit expansion. The study shows that credit boom creates non-trivial risk for macro aggregates and is followed by financial crisis in the economy.
Table of Contents
CHAPTER 1: INTRODUCTION
CHAPTER 2: RECENT ECONOMIC OVERVIEW IN AZERBAIJAN
CHAPTER 3: LITERATURE REVIEW
CHAPTER 4: CREDIT BOOM
4.1 MAIN REASONS OF CREDIT BOOMS
4.2 EMPIRICAL INDENTIFICATION OF CREDIT BOOMS
CHAPTER 5: DATA ANALYSIS AND THEORETICAL FRAMEWORK
5.1 DATA ANALYSIS OF THE DETERMINANTS OF EQUILIBRIUM LEVEL OF CREDIT
5.2 THEORETICAL FRAMEWORK
CHAPTER 6: EMPIRICAL ANALYSIS AND RESULTS
6.1 FINDING THE CREDIT BOOM LEVEL
6.2 UNIT ROOT TESTS
6.3 COINTEGRATION TESTS
6.4 VECTOR ERROR CORRECTION MODEL
6.5 MODEL CHECKING
CHAPTER 7: CONCLUSION AND DISCUSSION
Research Objectives and Key Topics
This thesis examines the credit boom that occurred in Azerbaijan in 2008, employing Vector Error Correction Models (VECM) to analyze the long-run and short-run dynamics of credit levels. The primary research goal is to identify the macroeconomic implications of rapid credit expansion and to determine the equilibrium level of credit within the Azerbaijani economy.
- Detection and identification of credit boom episodes using Hodrick-Prescott (HP) filtering.
- Econometric analysis of determinants of equilibrium credit levels, including oil prices, GDP, and exchange rates.
- Short-run and long-run dynamics of credit-to-GDP ratios using VECM methodology.
- Investigation of the nexus between rapid credit expansion and financial crises.
Excerpt from the Book
4.1 MAIN REASONS OF CREDIT BOOMS
Credit growth consists of three major components: financial deepening, normal cyclical upturns and excessive cyclical movements (which reflect credit booms). During an economic upturn credit aggregate increases more quickly than GDP does and this process is defined as financial deepening in literature. Goldsmith (1969) discusses the levels of financial intermediation and development of an economy and how they move together, but the drawback of his paper is that he does not mention the direction of causality, whether economic development leads to more financial deepening or financial deepening encourages economic development. Some other empirical studies show that financial development does cause financial development and it affects financial development through the increase in productivity. Credit expansion can be associated with normal cyclical upturns where because of some reasons they increase. But when these cyclical amplifications cross over some certain level, then it is said that a credit boom (excessive cyclical upturn) is emerged. I discuss the ways of finding these certain levels for credit booms later in Chapter 6.
There are several reasons for fast credit growth. One of the important factors that lead to credit booms is the financial accelerator, where shocks to asset prices and relative good prices get increased through balance sheet effects. There are some studies written about the financial accelerator, how they emerge, where financial imperfections (that basically result from information asymmetries and institutional shortcomings) are presented as the sources of these accelerators.
Summary of Chapters
CHAPTER 1: INTRODUCTION: This chapter introduces the topic of credit booms in Azerbaijan between 2000 and 2009 and outlines the research objective of linking credit expansion to macroeconomic indicators.
CHAPTER 2: RECENT ECONOMIC OVERVIEW IN AZERBAIJAN: This chapter provides context regarding the Azerbaijani economy, focusing on the oil sector's dominance and the performance of the banking system.
CHAPTER 3: LITERATURE REVIEW: This chapter reviews existing empirical research on identifying credit booms and their relationship with financial crises.
CHAPTER 4: CREDIT BOOM: This chapter discusses the components of credit growth, including financial deepening and excessive cyclical movements, while identifying the key drivers like the financial accelerator.
CHAPTER 5: DATA ANALYSIS AND THEORETICAL FRAMEWORK: This chapter details the data sources and the rationale for selecting variables such as real GDP, oil prices, and real effective exchange rates.
CHAPTER 6: EMPIRICAL ANALYSIS AND RESULTS: This chapter presents the results of the HP filter analysis, unit root tests, and VECM estimations to determine credit boom levels and dynamic adjustments.
CHAPTER 7: CONCLUSION AND DISCUSSION: This chapter synthesizes the research findings, confirming the strong link between the 2008 credit boom in Azerbaijan and the subsequent financial crisis.
Keywords
Credit boom, Azerbaijan, VECM, financial deepening, macroeconomic indicators, oil prices, GDP, cointegration, banking crisis, real effective exchange rate, financial accelerator, unit root test, monetary policy, credit-to-GDP ratio, economic fluctuations.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the credit boom in Azerbaijan during 2008 and its subsequent macroeconomic implications.
What are the primary themes covered in the study?
Key themes include the detection of credit booms, the relationship between financial deepening and credit expansion, and the impact of macro aggregates like oil prices and exchange rates on credit stability.
What is the main research question?
The study aims to determine the long-run and short-run equilibrium levels of credit in Azerbaijan and evaluate whether rapid credit growth served as a precursor to the 2008 financial crisis.
Which methodologies are employed?
The author uses the Hodrick-Prescott (HP) filter to identify credit booms and a Vector Error Correction Model (VECM) to analyze the dynamics and equilibrium of the credit-to-GDP ratio.
What does the main body discuss?
It covers literature review, theoretical frameworks of credit booms, data analysis, and the empirical modeling results using unit root and cointegration tests.
Which keywords best characterize this research?
Core terms include Credit boom, Azerbaijan, VECM, financial deepening, macro aggregates, and financial crisis.
Why are oil prices significant to this model?
As Azerbaijan is an oil-rich country, oil prices are a major determinant for capital inflows and export revenue, directly influencing credit availability.
What conclusion does the author draw about the 2008 crisis?
The author concludes that there is a strong direct relationship between the credit bubble observed from May to October 2008 and the financial crisis that followed later that year.
- Quote paper
- Rashad Karimov (Author), 2010, Rapid Credit Growth in Azerbaijan: Convergence or Boom? Macroeconomic Implications of Fast Credit Expansion, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/155027
