Working Paper: NBER ID: w15389
Authors: Michael D. Bordo; Joseph G. Haubrich
Abstract: The relatively infrequent nature of major credit distress events makes an historical approach particularly useful. Using a combination of historical narrative and econometric techniques, we identify major periods of credit distress from 1875 to 2007, examine the extent to which credit distress arises as part of the transmission of monetary policy, and document the subsequent effect on output. Using turning points defined by the Harding-Pagan algorithm, we identify and compare the timing, duration, amplitude and co-movement of cycles in money, credit and output. Regressions show that financial distress events exacerbate business cycle downturns both in the nineteenth and twentieth centuries and that a confluence of such events makes recessions even worse.
Keywords: Credit Crises; Monetary Policy; Economic Contractions
JEL Codes: E32; E50; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial distress events (G33) | business cycle downturns (E32) |
| major credit distress events (G01) | declines in output (E23) |
| credit spreads (G12) | GDP growth (O49) |
| tighter credit conditions (E51) | economic contractions (E32) |