Credit-Induced Boom and Bust

The Review of Financial Studies (Forthcoming)

63 Pages Posted: 8 Jul 2014 Last revised: 22 Dec 2016

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: October 2, 2016

Abstract

This paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy. First, the preemption regulation resulted in an 11% increase in annual lending in the 2004-2006 period, which is associated with a 3.3% rise in annual house price growth rate and a 2.2% expansion of employment in the non-tradable sectors. These effects are followed by a sharp decline in subsequent years. Furthermore, we show that the increase in the supply of credit reduced delinquencies during the boom years but increased them in bust years.

Keywords: Great Recession, subprime, credit supply, credit expansion, household leverage, household debt, preemption rule

JEL Classification: E20, E30, E51, G28

Suggested Citation

Di Maggio, Marco and Kermani, Amir, Credit-Induced Boom and Bust (October 2, 2016). The Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2463516 or http://dx.doi.org/10.2139/ssrn.2463516

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Kermani

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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