When Credit Bites Back: Leverage, Business Cycles, and Crises

42 Pages Posted: 24 Nov 2011  

Òscar Jordà

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)

Date Written: November 2011

Abstract

This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.

Suggested Citation

Jordà, Òscar and Schularick, Moritz and Taylor, Alan M., When Credit Bites Back: Leverage, Business Cycles, and Crises (November 2011). NBER Working Paper No. w17621. Available at SSRN: https://ssrn.com/abstract=1964166

Òscar Jordà (Contact Author)

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

Moritz Schularick

Free University of Berlin (FUB) ( email )

Lansstr. 7-9
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)

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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