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Credit-Induced Boom and Bust

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  • Marco Di Maggio
  • Amir Kermani

Abstract

This paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. First, the preemption regulation resulted in an 11% increase in annual lending in the 2004–2006 period, which is associated with a 3.3% rise in annual house price growth rate and a 2.2% expansion of employment in nontradable sectors. This was followed by a sharp decline in subsequent years. Furthermore, we show that the increase in the supply of credit reduced delinquencies during boom years, but increased them in bust years. Received June 7, 2015; editorial decision December 22, 2016 by Editor Robin Greenwood.

Suggested Citation

  • Marco Di Maggio & Amir Kermani, 2017. "Credit-Induced Boom and Bust," The Review of Financial Studies, Society for Financial Studies, vol. 30(11), pages 3711-3758.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:11:p:3711-3758.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx056
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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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