Down in the Slumps: The Role of Credit in Five Decades of Recessions

33 Pages Posted: 25 Apr 2017

Date Written: April 21, 2017

Abstract

We investigate the role of private sector credit in shaping the severity of recessions. Using a sample of 130 downturns in 26 advanced economies since the 1970s, we assess whether the growth or level of credit is the better predictor of the severity of a recession. In addition to GDP we examine other metrics of severity, including unemployment and labour productivity. We find that a period of rapid credit growth in the immediate run-up to a recession predicts a deeper and longer downturn than when credit growth has been subdued, whether associated with a systemic banking crisis or not and whether that credit growth reflects borrowing by households or businesses. Credit growth is a more statistically and economically significant predictor of a recession’s severity than the level of indebtedness, though there is some evidence that the effect of a credit boom is greater when leverage is high. A build-up in credit predicts worse recessions in terms of lower GDP per capita, higher unemployment and lost labour productivity.

Keywords: Recessions, Productivity, Local Projections

JEL Classification: G01, E51, N10

Suggested Citation

Bridges, Jonathan and Jackson, Christopher and McGregor, Daisy, Down in the Slumps: The Role of Credit in Five Decades of Recessions (April 21, 2017). Bank of England Working Paper No. 659. Available at SSRN: https://ssrn.com/abstract=2957700 or http://dx.doi.org/10.2139/ssrn.2957700

Jonathan Bridges (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Christopher Jackson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Daisy McGregor

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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