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

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  • Òscar Jordà
  • Moritz Schularick
  • Alan M. Taylor

Abstract

Do external imbalances increase the risk of financial crises? In this paper, we study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16567.

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Date of creation: Dec 2010
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Publication status: published as Òscar Jordà & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 340-378, June.
Handle: RePEc:nbr:nberwo:16567
Note: DAE IFM ME
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Find related papers by 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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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The ABCT making its presence in the maintream literature
    by Nicolas Cachanosky in Punto de Vista Economico on 2013-09-02 03:10:35
  2. Et si le cycle financier était à l'origine des déséquilibres courants de la zone euro ?
    by ? in D'un champ l'autre on 2014-11-05 20:19:00
  3. Quels liens entre crédit, instabilité financière et macroéconomie ?
    by Martin Anota in D'un champ l'autre on 2015-03-27 22:28:18
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