Working Paper: NBER ID: w16567
Authors: Scar Jorda; Moritz Schularick; Alan M. Taylor
Abstract: Do external imbalances increase the risk of financial crises? In this paper, we study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.
Keywords: financial crises; credit booms; external imbalances; macroeconomic dynamics; historical analysis
JEL Codes: C14; C52; E51; F32; F42; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit growth (E51) | Financial instability (F65) |
| Low natural interest rates (E43) | Financial instability (F65) |
| Credit growth (E51) | Low natural interest rates (E43) |
| Recessions associated with financial crises (G01) | Deeper recessions (E32) |
| Financial instability (F65) | Economic downturns (E32) |
| Current account deficits (F32) | Financial instability (F65) |