Credit Cycle and the Macroeconomy: Empirical Evidence from Korea

We estimate a common factor underlying the cyclical variation in default rates, i.e., the credit cycle factor, by using a structural approach to modeling default risk. We make use of loan data from individual banks and categories of non-bank financial institutions in Korea, and find that the estimated credit cycle factor shows economically plausible associations with various macroeconomic and financial market indicators, consistent with empirical evidence in the U.S. and European markets. Moreover, we find that the estimated credit cycle factor predicts macroeconomic and financial market conditions, such as the GDP growth rate, non-farm employment, and the amount of industrial loans.