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When credit bites back: leverage, business cycles, and crises

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  • Òscar Jordà
  • Moritz Schularick
  • Alan M. Taylor

Abstract

This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-27.

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Date of creation: 2011
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Handle: RePEc:fip:fedfwp:2011-27

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Keywords: Business cycles ; Financial crises;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Crisis in 1000 words—or less
    by Steve Keen in Steve Keen's Debtwatch on 2012-07-22 06:41:41
  2. Jubilee!
    by steve from virginia in Economic Undertow on 2012-08-01 23:16:47
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Cited by:
  1. James M. Nason & Ellis W. Tallman, 2012. "Business cycles and financial crises: the roles of credit supply and demand shocks," Working Papers 12-24, Federal Reserve Bank of Philadelphia.
  2. Binici, Mahir & Köksal, Bülent & Orman, Cüneyt, 2012. "Stock return comovement and systemic risk in the Turkish banking system," MPRA Paper 38663, University Library of Munich, Germany.
  3. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
  4. Krzysztof Olszewski, 2012. "The impact of commercial real estate on the financial sector, its tracking by central banks and some recommendations for the macro-financial stability policy of central banks," National Bank of Poland Working Papers 132, National Bank of Poland, Economic Institute.
  5. Alan M. Taylor, 2012. "External Imbalances and Financial Crises," NBER Working Papers 18606, National Bureau of Economic Research, Inc.
  6. Atif R. Mian & Amir Sufi & Francesco Trebbi, 2012. "Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises," NBER Working Papers 17831, National Bureau of Economic Research, Inc.
  7. Òscar Jordà, 2012. "Credit: a starring role in the downturn," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Apr 16.
  8. Jaanika Meriküll, 2012. "Households borrowing during a creditless recovery," Bank of Estonia Working Papers wp2012-2, Bank of Estonia, revised 22 Feb 2012.

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