Working Paper: CEPR ID: DP14492
Authors: Maria Dolores Gadea Rivas; Luc Laeven; Gabriel Pérez-Quiros
Abstract: We study the effects of credit over the business cycle, distinguishing between expansions and contractions. We find that there is a growth and risk trade-off in the pace of credit growth over the business cycle. While rapid credit growth tends to be followed by deeper recessions, we also find that credit growth has a positive impact on the duration of expansions. This poses a trade-off for the policymaker: Limiting the buildup of financial risk to avoid a deep recession can negatively affect the cumulation of economic growth during the expansion. We show that intermediate levels of credit growth maximize long-term growth while limiting volatility. Macroprudential policies should be used to manage this growth and risk trade-off, striking a balance between allowing expansions to last longer and avoiding deep recessions.
Keywords: Business Cycles; Macroprudential Policies; Credit Growth
JEL Codes: C22; E32; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit growth (E51) | recession severity (F44) |
| credit growth (E51) | duration of economic expansions (E32) |
| moderate credit growth (E51) | long-term growth (D25) |
| credit growth (E51) | financial risk (G32) |
| macroeprudential policies (E60) | risks from high credit growth (F65) |