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

  • Gadea Rivas, Maria Dolores
  • Pérez-Quirós, Gabriel

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 illustrate this failure 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9269.

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Date of creation: Dec 2012
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Handle: RePEc:cpr:ceprdp:9269
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  1. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises: The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
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  10. 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.
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  17. Andrew J. Filardo & Stephen F. Gordon, 1993. "Business cycle durations," Research Working Paper 93-11, Federal Reserve Bank of Kansas City.
  18. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  19. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
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