Working Paper: NBER ID: w24322
Authors: Atif R. Mian; Amir Sufi
Abstract: Every major financial crisis leaves its unique footprint on economic thought. The early banking crises taught us the importance of financial sector liquidity and the lender of last resort. The Great Depression highlighted the devastating effects of bank failures and the need for counter-cyclical fiscal and monetary policy. The Great Recession has brought to the surface the importance of credit-driven business cycles that operate through household demand. We discuss empirical evidence accumulated over the last decade supporting this view, and we also describe accompanying theoretical work that helps define these concepts.
Keywords: credit supply; household demand; business cycles; financial crises
JEL Codes: E32; E5; G01; G2; R2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit supply expansions (E51) | Increased household debt (G51) |
| Increased household debt (G51) | Economic fluctuations (E32) |
| Credit supply expansions (E51) | Boost household demand (D12) |
| Credit supply contractions (E51) | Significant drops in household spending (D12) |
| Credit supply contractions (E51) | Decrease in aggregate demand (E00) |
| Behavioral biases (D91) | Exacerbation of boom-bust cycles (E32) |
| Higher household debt (G51) | Lower subsequent growth (O49) |
| Higher household debt (G51) | Higher unemployment rates (J64) |