Working Paper: NBER ID: w15512
Authors: Moritz Schularick; Alan M. Taylor
Abstract: The crisis of the advanced economies in 2008-09 has focused new attention on money and credit fluctuations, financial crises, and policy responses. We study the behavior of money, credit, and macroeconomic indicators over the long run based on a new historical dataset for 14 countries over the years 1870-2008, using the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates. We show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we demonstrate that credit growth is a powerful predictor of financial crises, suggesting that such crises are "credit booms gone wrong" and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly.
Keywords: credit booms; financial crises; monetary policy; leverage cycles
JEL Codes: E44; E51; E58; G01; G20; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crises (G01) | output costs (D24) |
| credit-to-GDP ratio (F65) | crisis probabilities (G01) |
| credit growth (E51) | financial crises (G01) |
| credit growth (E51) | crisis probabilities (G01) |