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Do credit booms predict US recessions?

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  • Marius M. Mihai

Abstract

This paper investigates the role of bank credit in predicting US recessions since the 1960s in the context of a bivariate probit model. A set of results emerge. First, credit booms are shown to have strong positive effects in predicting declines in the business cycle at horizons ranging from 6 to 9 months. Second, I propose to isolate the effect of credit booms by identifying the contribution of excess bank liquidity alongside a housing factor in the downturn of each cycle. Third, the out‐of‐sample performance of the model is tested on the most recent credit‐driven recession: the Great Recession of 2008. The model performs better than a more parsimonious version where we restrict the effect of credit booms on the business cycle in the system to be zero.

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  • Marius M. Mihai, 2020. "Do credit booms predict US recessions?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 887-910, September.
    • Handle: RePEc:wly:jforec:v:39:y:2020:i:6:p:887-910
    DOI: 10.1002/for.2662
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    Cited by:

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    2. Anastasios Evgenidis & Anastasios G. Malliaris, 2022. "Monetary policy, financial shocks and economic activity," Review of Quantitative Finance and Accounting, Springer, vol. 59(2), pages 429-456, August.
    3. IIBOSHI, Hirokuni & IWATA, Yasuharu, 2023. "The Nexus between Public Debt and the Government Spending Multiplier: Fiscal Adjustments Matter," MPRA Paper 116347, University Library of Munich, Germany.
    4. , & Stein, Tobias, 2021. "Equity premium predictability over the business cycle," CEPR Discussion Papers 16357, C.E.P.R. Discussion Papers.
    5. Mihai, Marius M., 2022. "The commercial bank leverage factor in U.S. asset prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 156-171.

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