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Credit cycles as predictors of labor market slack: Evidence from the U․S․

Author

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  • López-Buenache, Germán
  • Borsi, Mihály Tamás
  • Rosa-García, Alfonso

Abstract

This paper empirically studies the relationship between credit and unemployment fluctuations in the U.S. economy for the period 1955–2023. Drawing on the business cycle literature that focuses on changes in output, we model unemployment dynamics using a Markov-switching framework extended with credit variables to assess the ability of credit to identify periods of labor market slack – instances where the unemployment rate exceeds its natural rate, exerting downward pressure on inflation. Our results show that contractions in real private credit carry valuable information for signaling labor market slack. Moreover, we find that cyclical variations in private credit have significant out-of-sample predictive power for labor market dynamics.

Suggested Citation

  • López-Buenache, Germán & Borsi, Mihály Tamás & Rosa-García, Alfonso, 2025. "Credit cycles as predictors of labor market slack: Evidence from the U․S․," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 1097-1111.
    • Handle: RePEc:eee:ecanpo:v:88:y:2025:i:c:p:1097-1111
    DOI: 10.1016/j.eap.2025.08.006
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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