Do credit booms predict US recessions?
Marius M. Mihai
Journal of Forecasting, 2020, vol. 39, issue 6, 887-910
This paper investigates the role of bank credit in predicting US recessions since the 1960s in the context of a bivariate probit model. A set of results emerge. First, credit booms are shown to have strong positive effects in predicting declines in the business cycle at horizons ranging from 6 to 9 months. Second, I propose to isolate the effect of credit booms by identifying the contribution of excess bank liquidity alongside a housing factor in the downturn of each cycle. Third, the out‐of‐sample performance of the model is tested on the most recent credit‐driven recession: the Great Recession of 2008. The model performs better than a more parsimonious version where we restrict the effect of credit booms on the business cycle in the system to be zero.
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jforec:v:39:y:2020:i:6:p:887-910
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