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Growth-and-Risk Trade-off

Maria Dolores Gadea Rivas, Luc Laeven () and Gabriel Pérez-Quirós
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; credit growth; macroprudential policies (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
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