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Abstract:
This paper presents an empirical investigation of the role of credit in the
post-stabilization consumption booms of Mexico, Chile, and Israel. Credit from
the banking sector to the private sector expanded very rapidly following the
stabilizations. I show that this increase in credit reduced the proportion of
consumers that were liquidity constrained in the economy. This reduction in
liquidity constraints could have helped to fuel the observed consumption
booms. In addition, I show that the most important channels for the expansion
in credit to consumers in Mexico are the rapid remonetization of the economy,
the fall in the ratio of debt held by banks to GDP held by banks, and the
increase in the foreign liabilities of banks. For Chile, the most important
channel is the remonetization of the economy, whereas in Israel, it is the
crowding in effect from the fall in the ratio of public debt held by banks to
GDP. The fact that only the crowding in effect was important for Israel, is
explained by the differences between its banking system and those of the other
countries.
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