Three Approaches to Macrofinance: Evidence from 140 Years of Data

Abstract

We interrogate 140 years of macrofinancial data from three directions. The first approach pays attention to the slow buildup of financial imbalances that threaten financial stability and isolates medium-term movements in credit and property prices to identify national financial cycles. We show that the data reveals the reemergence of outsized financial cycles since the 1980s. In particular, we document the existence of an outsized financial cycle in the United States during the interwar period. We show that national financial cycles tend to move together and that their comovement has become particularly marked since the 1980s. Further, we show that virtually all financial booms are accompanied by housing-finance booms. The second approach pays attention to the predictive information in the consumption to wealth ratio. We show that the consumption to wealth ratio predicts not only global real rates (as has already been shown) but also property excess returns and the term spread although not stock excess returns. The third approach pays attention to the risk appetite of financial market intermediaries whose marginal value of wealth prices a broad class of financial assets. We create a metric for intermediary risk appetite for an earlier period not covered by the extant literature (1920-1970) and show that intermediary risk appetite predicts stock excess returns. We conclude with a discussion of our findings and the path forward for marcrofinance.

Keywords: financial cycle, consumption to wealth ratio, risk appetite

JEL Classification: G00, G12, E44