IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons

Listed author(s):
  • Òscar Jordà
  • Moritz Schularick
  • Alan M Taylor

Do external imbalances increase the risk of financial crises? This paper studies the experience of 14 developed countries over 140 years (1870–2008). It exploits the long-run data set in a number of different ways. First, the paper applies new statistical tools to describe the temporal and spatial patterns of crises and identifies five episodes of global financial instability in the past 140 years. Second, it studies the macroeconomic dynamics before crises and shows that credit growth tends to be elevated and short-term interest rates depressed relative to the “natural rate” in the run-up to global financial crises. Third, the paper shows that recessions associated with crises lead to deeper slumps and stronger turnarounds in imbalances than during normal recessions. Finally, the paper asks to what extent external imbalances help predict financial crises. The overall result is that credit growth emerges as the single best predictor of financial instability. External imbalances have played an additional role, but more so in the pre-WWII era of low financialization than today.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.palgrave-journals.com/imfer/journal/v59/n2/pdf/imfer20118a.pdf
File Function: Link to full text PDF
Download Restriction: Access to full text is restricted to subscribers.

File URL: http://www.palgrave-journals.com/imfer/journal/v59/n2/full/imfer20118a.html
File Function: Link to full text HTML
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Palgrave Macmillan & International Monetary Fund in its journal IMF Economic Review.

Volume (Year): 59 (2011)
Issue (Month): 2 (June)
Pages: 340-378

as
in new window

Handle: RePEc:pal:imfecr:v:59:y:2011:i:2:p:340-378
Contact details of provider: Web page: http://www.palgrave-journals.com/

Web page: http://www.imf.org/external/index.htm

Order Information: Web: http://www.springer.com/economics/journal/41308/PS2

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window

  1. Romain Ranciere & Aaron Tornell & Frank Westermann, 2005. "Systemic Crises and Growth," NBER Working Papers 11076, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  3. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  4. de la Escosura, Leandro Prados, 2010. "Spain’s international position, 1850-1913," Revista de Historia Económica, Cambridge University Press, vol. 28(01), pages 173-215, March.
  5. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
  6. Valerie Cerra & Sweta C. Saxena, 2005. "Growth Dynamics: The Myth of Economic Recovery," Macroeconomics 0508008, EconWPA.
  7. Miguel Almunia & Agustín Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2010. "From Great Depression to Great Credit Crisis: similarities, differences and lessons," Economic Policy, CEPR;CES;MSH, vol. 25, pages 219-265, 04.
  8. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
  9. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2009. "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," NBER Working Papers 14826, National Bureau of Economic Research, Inc.
  10. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, .
  11. Robert J. Barro, 2007. "Rare Disasters, Asset Prices, and Welfare Costs," NBER Working Papers 13690, National Bureau of Economic Research, Inc.
  12. Oscar Jorda, 2010. "Carry Trade," Working Papers 1019, University of California, Davis, Department of Economics.
  13. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: Challenges for macroeconomics and policy," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1426-1461, December.
  14. Taylor, Alan M., 2002. "A century of current account dynamics," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 725-748, November.
  15. Khandani, Amir E. & Kim, Adlar J. & Lo, Andrew W., 2010. "Consumer credit-risk models via machine-learning algorithms," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2767-2787, November.
  16. Tena Junguito, Antonio, 2007. "New series of the Spanish foreign sector, 1850-2000," IFCS - Working Papers in Economic History.WH wp07-14, Universidad Carlos III de Madrid. Instituto Figuerola.
  17. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics 9410002, EconWPA.
  18. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
  19. Ben S. Bernanke, 2007. "Global imbalances: recent developments and prospects," Speech 317, Board of Governors of the Federal Reserve System (U.S.).
  20. Chernyshoff, Natalia & Jacks, David S. & Taylor, Alan M., 2009. "Stuck on gold: Real exchange rate volatility and the rise and fall of the gold standard, 1875-1939," Journal of International Economics, Elsevier, vol. 77(2), pages 195-205, April.
  21. Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
  22. Travis Berge & Oscar Jorda, 2009. "The Classification of Economic Activity into Expansions and Recessions," Working Papers 918, University of California, Davis, Department of Economics.
  23. Reinhart, Carmen & Kaminsky, Graciela, 2000. "Las crisis gemelas: las causas de los problemas bancarios y de balanza de pagos
    [The twin crises: Te causes of banking and balance of payments problems]
    ," MPRA Paper 13842, University Library of Munich, Germany.
  24. Schularick, Moritz & Taylor, Alan M., 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008," CEPR Discussion Papers 7570, C.E.P.R. Discussion Papers.
  25. repec:fip:fedgsq:y:2007:i:sep11 is not listed on IDEAS
  26. repec:cte:whrepe:1067 is not listed on IDEAS
  27. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
  28. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
  29. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 51-82, 04.
  30. Chris Hunt, 2008. "Financial turmoil and global imbalances: the end of Bretton Woods II?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, September.
  31. Obstfeld, Maurice, 2010. "The immoderate world economy," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 603-614, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pal:imfecr:v:59:y:2011:i:2:p:340-378. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)

or (Rebekah McClure)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.