Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons

43 Pages Posted: 6 Dec 2010  

Oscar Jorda

University of California, Davis - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of San Francisco

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)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2010

Abstract

Do external imbalances increase the risk of financial crises? In this paper, we study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.

Suggested Citation

Jorda, Oscar and Schularick, Moritz and Taylor, Alan M., Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons (December 2010). NBER Working Paper No. w16567. Available at SSRN: https://ssrn.com/abstract=1719928

Oscar Jorda (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
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HOME PAGE: http://old.econ.ucdavis.edu/faculty/jorda/

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

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HOME PAGE: http://www.frbsf.org/economic-research/economists/oscar-jorda/

Moritz Schularick

Free University of Berlin (FUB) ( email )

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Berlin 14195, 14195
Germany

Alan M. Taylor

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)

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HOME PAGE: http://nber.org

Centre for Economic Policy Research (CEPR)

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United Kingdom

HOME PAGE: http://cepr.org

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