Growth-and-Risk Trade-Off

62 Pages Posted: 25 Mar 2020

See all articles by Maria Dolores Gadea Rivas

Maria Dolores Gadea Rivas

University of Zaragoza

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Gabriel Pérez-Quirós

Banco de España

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Date Written: March 2020

Abstract

We study the effects of credit over the business cycle, distinguishing between expansions and contractions. We find that there is a growth and risk trade-off in the pace of credit growth over the business cycle. While rapid credit growth tends to be followed by deeper recessions, we also find that credit growth has a positive impact on the duration of expansions. This poses a trade-off for the policymaker: Limiting the buildup of financial risk to avoid a deep recession can negatively affect the cumulation of economic growth during the expansion. We show that intermediate levels of credit growth maximize long-term growth while limiting volatility. Macroprudential policies should be used to manage this growth and risk trade-off, striking a balance between allowing expansions to last longer and avoiding deep recessions.

Keywords: business cycles, credit growth, macroprudential policies

JEL Classification: C22, E32, E61

Suggested Citation

Gadea Rivas, Maria Dolores and Laeven, Luc A. and Pérez-Quirós, Gabriel, Growth-and-Risk Trade-Off (March 2020). CEPR Discussion Paper No. DP14492, Available at SSRN: https://ssrn.com/abstract=3560299

Maria Dolores Gadea Rivas (Contact Author)

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriel Pérez-Quirós

Banco de España

Alcala 50
Madrid 28014
Spain

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