The Aftermath of Credit Booms: Evidence from Credit Ceiling Removals

82 Pages Posted: 25 Oct 2023

See all articles by Matthew Baron

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Isaac Green

San Diego State University

Date Written: September 26, 2023

Abstract

We study removals of "credit ceilings," quantitative limits on bank credit supply imposed by many countries until the 1980s. Exploiting differences in loan types affected, we find that these removals predict sudden increases in bank credit, residential investment, house prices, and stock prices, followed by reversals, recessions, and banking crises. These effects are separate from those of other financial deregulations. Our analysis explores two phenomena related to credit booms: the "calm before the storm" and "irreversibility." Overall, our results suggest that credit supply shocks do not simply amplify existing fragilities but can initiate economic boom-and-bust cycles on their own.

Keywords: credit booms, banking crises, financial deregulation

JEL Classification: E51, G01, G15, G21, N20

Suggested Citation

Baron, Matthew and Green, Isaac, The Aftermath of Credit Booms: Evidence from Credit Ceiling Removals (September 26, 2023). Available at SSRN: https://ssrn.com/abstract=4584900 or http://dx.doi.org/10.2139/ssrn.4584900

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Isaac Green

San Diego State University ( email )

San Diego, CA 92182-0763
United States

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