Household and Corporate Credit in Emerging Economies: Symbiosis or Competition?

Standard consumption-investment theory predicts counter-cyclical (pro-cyclical) behavior of household (corporate) credit whereby households' consumption-smoothing and firms' investment motives are aligned. Counter to the theoretical symbiosis consistent with U.S. data, we demonstrate that the pro-cyclical behavior of both household and corporate credit in emerging economies, rationalized by households' leveraged investing in domestic assets and followed by large responses in asset values, engenders competition between them and hinders the growth of small and medium businesses. Our empirical findings suggest another way of understanding the credit cycle puzzle in emerging economies, counter-cyclical behavior of real interest rate and large consumption volatility.