Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons

Oscar Jorda, Moritz Schularick and Alan Taylor

No 16567, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Do external imbalances increase the risk of financial crises? In this paper, we study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.

JEL-codes: C14 C52 E51 F32 F42 N10 N20 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ifn and nep-opm
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Citations: View citations in EconPapers (62)

Published as Òscar Jordà & Moritz Schularick & Alan M Taylor, 2011. "Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 340-378, June.

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