When to Lean Against the Wind

37 Pages Posted: 4 Aug 2017 Last revised: 2 Jul 2018

See all articles by Björn Richter

Björn Richter

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Paul Wachtel

New York University - Stern School of Business

Date Written: July 2017

Abstract

This paper shows that policy-makers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan-to-deposit-ratio are much more likely to end in a systemic banking crisis. We evaluate the predictive accuracy for different classification models and show that the characteristics of the credit boom contain valuable information for sorting the data into good and bad booms. Importantly, we demonstrate that policy-makers have the ability to spot dangerous credit booms on the basis of data available in real time. We also show that these results are robust across alternative specifications and time periods.

Keywords: Banking Crisis, Credit Booms, crisis prediction, macroprudential policy

JEL Classification: E32, E52, G01

Suggested Citation

Richter, Björn and Schularick, Moritz and Wachtel, Paul, When to Lean Against the Wind (July 2017). CEPR Discussion Paper No. DP12188, Available at SSRN: https://ssrn.com/abstract=3011426

Björn Richter (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paul Wachtel

New York University - Stern School of Business ( email )

44 West 4th St.
New York, NY 10012
United States
212-998-4030 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~pwachtel

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