Working Paper: CEPR ID: DP9269
Authors: Maria Dolores Gadea Rivas; Gabriel Perez Quiros
Abstract: 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.
Keywords: Business Cycles; Credit; Financial Crisis; Forecasting
JEL Codes: C22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit buildup (G51) | economic growth (O49) |
| credit buildup (G51) | probability of remaining in recession (E37) |
| credit buildup (G51) | probability of continuing expansion (C54) |
| credit levels (F34) | business cycle dynamics (E32) |
| credit to GDP growth (E20) | recession predictions (F44) |