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

38 Pages Posted: 17 Nov 2009 Last revised: 22 May 2022

See all articles by Moritz Schularick

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Alan M. Taylor

Columbia University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: November 2009

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.

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: https://ssrn.com/abstract=1505835

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alan M. Taylor (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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)

London
United Kingdom

HOME PAGE: http://cepr.org

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