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Sovereigns versus banks: credit, crises, and consequences

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  • Jorda, Oscar

    ()
    (Federal Reserve Bank of San Francisco)

  • Schularick, Moritz

    (University of Bonn)

  • Taylor, Alan M.

    (University of California, Davis)

Abstract

Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-37.

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Length: 31 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedfwp:2013-37

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Keywords: leverage; booms; recessions; financial crises; business cycles; local projections;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Credit, Crises, and Consequences
    by noreply@blogger.com (Carola Binder) in Quantitative Ease on 2013-10-14 00:02:00
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Cited by:
  1. Perugini, Cristiano & Hölscher, Jens & Collie, Simon, 2013. "Inequality, credit expansion and financial crises," MPRA Paper 51336, University Library of Munich, Germany.
  2. Maurice Obstfeld, 2013. "On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability," IMES Discussion Paper Series 13-E-08, Institute for Monetary and Economic Studies, Bank of Japan.

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