Working Paper: CEPR ID: DP10781
Authors: Scar Jord; Moritz Schularick; Alan M. Taylor
Abstract: What risks do asset price bubbles pose for the economy? This paper studies bubbles in housing and equity markets in 17 countries over the past 140 years. History shows that not all bubbles are alike. Some have enormous costs for the economy, while others blow over. We demonstrate that what makes some bubbles more dangerous than others is credit. When fueled by credit booms, asset price bubbles increase financial crisis risks; upon collapse they tend to be followed by deeper recessions and slower recoveries. Credit-financed housing price bubbles have emerged as a particularly dangerous phenomenon.
Keywords: bank lending; boom; bust; crises; debt overhang; local projections
JEL Codes: C14; C32; E44; E51; G01; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asset price bubbles (G19) | risk of financial crises (G01) |
| credit growth (E51) | risk of financial crises (G01) |
| credit-financed housing price bubbles (G59) | risk of financial crises (G01) |
| interaction of credit and asset prices (E44) | risk of financial crises (G01) |
| nature of the bubble + pace of credit growth (E32) | output costs during financial crises (G01) |
| presence of a bubble + rapid credit growth (E32) | worse economic outcomes (F69) |