Abstract

http://ssrn.com/abstract=1505835
 
 

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Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008


Moritz Schularick


Free University of Berlin (FUB)

Alan M. Taylor


University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

November 2009

NBER Working Paper No. w15512

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.

Number of Pages in PDF File: 38


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Date posted: November 17, 2009  

Suggested Citation

Schularick, Moritz and Taylor, Alan M., Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008 (November 2009). NBER Working Paper No. w15512. Available at SSRN: http://ssrn.com/abstract=1505835

Contact Information

Moritz Schularick
Free University of Berlin (FUB) ( email )
Lansstr. 7-9
Berlin 14195, 14195
Germany
Alan M. Taylor (Contact Author)
University of California, Davis - Department of Economics ( email )
One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)
HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/
University of Virginia - Department of Economics ( email )
P.O. Box 400182
Charlottesville, VA 22904-4182
United States
(434)-924-3177 (Phone)
(434)-982-2904 (Fax)
HOME PAGE: http://people.virginia.edu/~amt7u
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://nber.org
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
HOME PAGE: http://cepr.org
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