High frequency monitoring of credit creation: A new tool for central banks in emerging market economies

This study utilizes weekly datasets on loan growth in Colombia to develop a daily indicator of credit expansion using a two-step machine learning approach. Initially, employing Random Forests (RF), missing data in the raw credit indicator is filled using high frequency indicators like spreads, interest rates, and stock market returns. Subsequently, Quantile Random Forest identifies periods of excessive credit creation, particularly focusing on growth quantiles above 95 %, indicative of potential financial instability. Unlike previous studies, this research combines machine learning with mixed frequency analysis to create a versatile early warning instrument for identifying instances of excessive credit growth in emerging market economies. This methodology, with its ability to handle nonlinear relationships and accommodate diverse scenarios, offers significant value to central bankers and macroprudential authorities in safeguarding financial stability. ●We develop a daily indicator of credit expansion using a two-step machine learning approach.●Using Random Forests, we fill missing data in the raw credit indicator with high-frequency indicators.●Quantile Random Forest identifies periods of excessive credit creation.●We combine machine learning with mixed frequency analysis.●We create an early warning tool to identify excessive credit growth in emerging markets.