When Credit Bites Back: Leverage, Business Cycles, and Crises

Alan Taylor, Moritz Schularick and Oscar Jorda

No 8678, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.

Keywords: Business cycles; Financial crises; Leverage; Local projections (search for similar items in EconPapers)
JEL-codes: C14 C52 E51 F32 F42 N10 N20 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (143)

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Related works:
Working Paper: When Credit Bites Back: Leverage, Business Cycles and Crises (2012)
Working Paper: When Credit Bites Back: Leverage, Business Cycles and Crises (2012)
Working Paper: When credit bites back: leverage, business cycles, and crises (2011)
Working Paper: When Credit Bites Back: Leverage, Business Cycles, and Crises (2011)
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