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The failure to predict the Great Recession. The failure of academic economics? A view focusing on the role of credit

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  • Maria Dolores Gadea Rivas

    ()
    (University of Zaragoza)

  • Gabriel Perez-Quiros

    ()
    (Banco de España y CEPR)

Abstract

Much has been written about why economists failed to predict the latest financial and real crisis. Reading the recent literature, it seems that the crisis was so obvious that economists must have been blind when looking at data not to see it coming. In this paper, we analyze whether such claims are justified by looking at one of the most cited and relevant variables in this analysis, the now infamous credit to GDP chart. We compare the conclusions reached in the literature after the crisis with the results that could have been drawn from an ex ante analysis. We show that, even though credit affects the business cycle in both the expansion and the recession phases, this effect is almost negligible and impossible to exploit from a policymaker’s point of view.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1240e.pdf
File Function: First version, December 2012
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1240.

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Length: 51 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:bde:wpaper:1240

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Keywords: business cycles; forecasting; financial crisis;

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  1. Giacomini, Raffaella & White, Halbert, 2003. "Tests of Conditional Predictive Ability," University of California at San Diego, Economics Working Paper Series qt5jk0j5jh, Department of Economics, UC San Diego.
  2. Andrew J. Filardo & Stephen F. Gordon, 1993. "Business cycle durations," Research Working Paper 93-11, Federal Reserve Bank of Kansas City.
  3. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  4. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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  8. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
  9. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1.
  10. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
  11. Rose, Andrew K & Spiegel, Mark, 2010. "Cross-Country Causes and Consequences of the Crisis: An Update," CEPR Discussion Papers 7901, C.E.P.R. Discussion Papers.
  12. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  13. Carmen M. Reinhart & Vincent R. Reinhart, 2010. "After the Fall," NBER Working Papers 16334, National Bureau of Economic Research, Inc.
  14. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  15. Oscar Jorda & Moritz Schularick & Alan Taylor, 2012. "When Credit Bites Back: Leverage, Business Cycles and Crises," Working Papers 1224, University of California, Davis, Department of Economics.
  16. Watson, Mark W, 1994. "Business-Cycle Durations and Postwar Stabilization of the U.S. Economy," American Economic Review, American Economic Association, vol. 84(1), pages 24-46, March.
  17. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  18. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises," IMF Working Papers 10/146, International Monetary Fund.
  19. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  20. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1.
  21. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Cited by:
  1. Òscar Jordà, 2013. "Assessing the historical role of credit: business cycles, financial crises and the legacy of Charles S. Peirce," Working Paper Series 2013-19, Federal Reserve Bank of San Francisco.

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