Macrofinancial Effects of Non-performing Loans

Abstract

We investigate the macrofinancial impacts of non-performing loans using a global non-performing loan dataset constructed from the Financial Stability Indicators database of IMF. We adopt two approaches: the panel VAR approach and the episodic approach. The post-estimation impulse response functions based on panel VAR models reveal that an increase in the NPL ratio significantly lowers the GDP growth rate and raises the unemployment rate. The episodic approach focuses on the episodes of a sharp drop in the NPL ratio followed by a sustained and substantial reduction in the NPL ratio. The macrofinancial effects of sharp drops in the NPL ratio is measured by estimating the average treatment effect on the treated with propensity score matching. The results demonstrate that a sharp drop in the NPL ratio significantly enhances the macrofinancial performance of an economy, raising the GDP growth rate, the investment growth rate, and the growth rate of loans and lowering the unemployment rate.