Mortgages and Credit Cycle Divergence in Eurozone Economies

Abstract

The dynamics of household mortgage credit and loans to non-financial busi- ness have diverged significantly in recent decades. In this paper we construct and describe credit cycles for total bank credit, household mortgages and non- financial business loans for 14 EMU economies over 1990–2013. We explore the cross-country coherence of credit gaps measured by synchronicity of move- ments and similarity of amplitudes, and analyze correlates of credit cycle coher- ence. Two findings stand out. As household mortgage credit assumes a larger share in total credit, credit cycle coherence across EMU economies decreases. EMU membership is associated with convergence of business credit cycles but divergence of household mortgage credit cycles. These findings survive a bat- tery of sensitivity checks. We discuss implications for monetary policy.