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The failure to predict the Great Recession. The failure of academic economics? A view focusing on the role of credit

Listed author(s):
  • Maria Dolores Gadea Rivas

    ()

    (University of Zaragoza)

  • Gabriel Perez-Quiros

    ()

    (Banco de España y CEPR)

Much has been written about why economists failed to predict the latest financial and real crisis. Reading the recent literature, it seems that the crisis was so obvious that economists must have been blind when looking at data not to see it coming. In this paper, we analyze whether such claims are justified by looking at one of the most cited and relevant variables in this analysis, the now infamous credit to GDP chart. We compare the conclusions reached in the literature after the crisis with the results that could have been drawn from an ex ante analysis. We show that, even though credit affects the business cycle in both the expansion and the recession phases, this effect is almost negligible and impossible to exploit from a policymaker’s point of view.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1240e.pdf
File Function: First version, December 2012
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 1240.

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Length: 51 pages
Date of creation: Dec 2012
Handle: RePEc:bde:wpaper:1240
Contact details of provider: Web page: http://www.bde.es/

Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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  1. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
  2. Andrew J. Filardo & Stephen F. Gordon, 1993. "Business cycle durations," Research Working Paper 93-11, Federal Reserve Bank of Kansas City.
  3. Giacomini, Raffaella & White, Halbert, 2003. "Tests of Conditional Predictive Ability," University of California at San Diego, Economics Working Paper Series qt5jk0j5jh, Department of Economics, UC San Diego.
  4. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," CEPR Discussion Papers 8678, C.E.P.R. Discussion Papers.
  5. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
  6. Carmen M. Reinhart & Vincent Reinhart, 2010. "After the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 17-60.
  7. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  8. 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.
  9. 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.
  10. 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.
  11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  13. Enrique G. Mendoza & Marco E. Terrones, 2008. "An anatomy of credit booms: evidence from macro aggregates and micro data," International Finance Discussion Papers 936, Board of Governors of the Federal Reserve System (U.S.).
  14. Watson, Mark W, 1994. "Business-Cycle Durations and Postwar Stabilization of the U.S. Economy," American Economic Review, American Economic Association, vol. 84(1), pages 24-46, March.
  15. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
  16. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  17. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  18. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
  19. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, April.
  20. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1, April.
  21. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1 National Bureau of Economic Research, Inc.
  22. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  23. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  24. Andrew J. Filardo, 1993. "Business cycle phases and their transitional dynamics," Research Working Paper 93-14, Federal Reserve Bank of Kansas City.
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