trend over the two years after the peak. Investment swung sharply in the most severe credit boom and bust episodes. For example, during the Asian financial crisis of the late 1990s, in the median affected EMDE, investment contracted by 3 percentage points of GDP in 1998 and by 5.6 percentage points of GDP in 1999.<sup>26</sup> Similarly, investment growth slowed during deleveraging episodes. Real investment dropped below its long‐term trend by about 2 percentage points of GDP during the last three years of the median deleveraging episode (Figure 1.1). After the trough of a typical deleveraging episode, real investment growth bounced back and, within three years, rose near or slightly above its long‐term trend.

# **Credit and investment booms together**

Although investment growth tended to rise during credit booms, not all credit booms were associated with investment booms. For instance, Mendoza and Terrones (2012) document that the coincidence between investment booms and credit booms in EMDEs was about 34 percent (26 percentage points lower than the coincidence in AEs). The moderate coincidence of credit booms and investment booms may reflect credit booms that mainly fueled consumption (Mendoza and Terrones 2012; Elekdag and Wu 2013). In a quarter of past credit booms, consumption rose above its Hodrick‐Prescott filtered trend by 3 percentage points of GDP during the peak of the credit boom. Consumption on average fell below trend by about 1 percentage point of GDP during deleveraging episodes (Figure 1.1).

Following former studies and in parallel to credit booms, investment surges are defined as years when the investment‐to‐GDP ratio is at least one (1.65 for investment booms) standard deviation higher than its long‐term Hodrick‐Prescott filtered trend. Similarly, episodes of investment slowdown are defined as years in which the investment‐to‐GDP ratio is at least one standard deviation below its Hodrick‐Prescott filtered trend.<sup>27</sup> Investment surges in AEs occurred with credit booms more often than in EMDEs, with a more rapid rise in investment. In EMDEs, about 40 percent of credit booms were accompanied by investment surges around the peak year of a credit boom (Figure 1.2). More than 65 percent of investment surges that coincided with credit booms during the peak year qualified as investment booms in advanced economies, but only 56 percent of such investment surges turned out to be investment booms in EMDEs.

After the global financial crisis, the coincidence between credit booms and investment surges during the peak year of a credit boom dropped significantly (Figure 1.2). By 2007, about half of the EMDEs in a credit boom were also in an investment surge. However, from 2010 onwards, there is virtually no EMDE that was both in a credit boom and in an investment surge. The number of EMDEs in a credit boom increased from two in 2010 to ten in 2015 (Azerbaijan, Bolivia, China, Cote d’Ivoire, Kenya, Kuwait, Oman, the Philippines, Qatar, and Turkey) while the number of EMDEs in investment surges dropped from eight to four.<sup>28</sup> In AEs, both the number of countries in a credit boom and the number of countries in an investment surge fell from around five to almost zero.

> 26 The directly affected EMDEs include China, Indonesia, Malaysia, Mongolia, the Philippines, and Thailand.

> 27 The results are similar when investment growth, instead of the investment‐to‐GDP ratio, is used.

> 28 The four countries are Colombia, Namibia, the Philippines, and Saudi Arabia. The identification of Saudi Arabia is not supported by investment growth data.

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