Working Paper: NBER ID: w22743
Authors: Scar Jord; Moritz Schularick; Alan M. Taylor
Abstract: In advanced economies, a century-long near-stable ratio of credit to GDP gave way to rapid financialization and surging leverage in the last forty years. This “financial hockey stick” coincides with shifts in foundational macroeconomic relationships beyond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments, which we can document thanks to a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility, but also lower growth, more tail risk, as well as tighter real-real and real-financial correlations. International real and financial cycles also cohere more strongly. The new stylized facts that we discover should prove fertile ground for the development of a new generation of macroeconomic models with a prominent role for financial factors.
Keywords: Macrofinancial history; Business cycle; Credit to GDP; Financialization; Leverage
JEL Codes: E01; E13; E30; E32; E44; E51; F42; F44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| leverage (G24) | business cycle volatility (E32) |
| leverage (G24) | severity of economic downturns (F44) |
| financialization (F30) | behavior of business cycles (E32) |
| household credit (G51) | leverage (G24) |
| mortgage lending (G21) | leverage (G24) |
| leverage (G24) | homeownership rates (R21) |
| leverage (G24) | dynamics of business cycle (E32) |