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Down in the slumps: the role of credit in five decades of recessions

Jonathan Bridges (jonathan.bridges@bankofengland.co.uk), Christopher Jackson (christopher.jackson@bankofengland.co.uk) and Daisy McGregor (daisy.mcgregor@bankofengland.co.uk)
Additional contact information
Christopher Jackson: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Daisy McGregor: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 659, Bank of England working papers from Bank of England

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 (search for similar items in EconPapers)
JEL-codes: E51 G01 N10 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-04-21
New Economics Papers: this item is included in nep-ban, nep-his, nep-mac and nep-pke
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0659

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