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When Credit Bites Back: Leverage, Business Cycles, and Crises

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  • Òscar Jordà
  • Moritz HP. Schularick
  • Alan M. Taylor

Abstract

This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17621.

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Date of creation: Nov 2011
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Handle: RePEc:nbr:nberwo:17621

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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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