Growth-and-Risk Trade-off

Pérez-Quirós, Gabriel, Maria Dolores Gadea Rivas and Luc Laeven
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

No 14492, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; Macroprudential policies; Credit growth (search for similar items in EconPapers)
JEL-codes: C22 E32 E61 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP14492 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Growth-and-risk trade-off (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14492

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14492

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().