The Failure to Predict the Great Recession - The Failure of Academic Economics? A View Focusing on the Role of Credit

51 Pages Posted: 19 Dec 2012

Date Written: December 17, 2012

Abstract

Much has been written about why economists failed to predict the latest financial and real crisis. Reading the recent literature, it seems that the crisis was so obvious that economists must have been blind when looking at data not to see it coming. In this paper, we analyze whether such claims are justified by looking at one of the most cited and relevant variables in this analysis, the now infamous credit to GDP chart. We compare the conclusions reached in the literature after the crisis with the results that could have been drawn from an ex ante analysis. We show that, even though credit affects the business cycle in both the expansion and the recession phases, this effect is almost negligible and impossible to exploit from a policymaker’s point of view.

Keywords: business cycles, forecasting, financial crisis

JEL Classification: C22, E32

Suggested Citation

Gadea Rivas, Maria Dolores and Pérez-Quirós, Gabriel, The Failure to Predict the Great Recession - The Failure of Academic Economics? A View Focusing on the Role of Credit (December 17, 2012). Banco de Espana Working Paper No. 1240, Available at SSRN: https://ssrn.com/abstract=2190309 or http://dx.doi.org/10.2139/ssrn.2190309

Maria Dolores Gadea Rivas (Contact Author)

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

Gabriel Pérez-Quirós

Banco de España

Alcala 50
Madrid 28014
Spain

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