Working Paper: NBER ID: w27396
Authors: Robin Greenwood; Samuel G. Hanson; Andrei Shleifer; Jakob Ahm Sørensen
Abstract: Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.
Keywords: financial crises; predictability; credit cycles; macro-financial policies
JEL Codes: E44; E7; G01; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rapid credit growth (F65) | elevated probability of entering a financial crisis (F65) |
| asset price growth (G19) | elevated probability of entering a financial crisis (F65) |
| credit growth + asset price growth (E44) | elevated probability of entering a financial crisis (F65) |
| overheating in credit markets (across countries) (F65) | enhanced predictive power for crises (G01) |
| business credit markets (G21) | predict future crises (G01) |
| household credit markets (G51) | predict future crises (G01) |
| business and household credit markets (combined) (G21) | higher risk of crises (H12) |