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Sovereigns versus Banks: Credit, Crises, and Consequences

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Listed:
  • Jorda, Oscar

    () (Federal Reserve Bank of San Francisco)

  • Schularick, Moritz

    (University of Bonn)

  • Taylor, Alan M.

    (University of California, Davis)

Abstract

Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.

Suggested Citation

  • Jorda, Oscar & Schularick, Moritz & Taylor, Alan M., 2013. "Sovereigns versus Banks: Credit, Crises, and Consequences," Working Paper Series 2013-37, Federal Reserve Bank of San Francisco, revised 01 Feb 2014.
  • Handle: RePEc:fip:fedfwp:2013-37
    DOI: 10.24148/wp2013-37
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    References listed on IDEAS

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    More about this item

    Keywords

    leverage; booms; recessions; financial crises; business cycles; local projections;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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