Luc Laeven (),
Gabriel Perez-Quiros and
María Dolores Gadea Rivas
Authors registered in the RePEc Author Service: Gabriel Perez Quiros
No 2397, Working Paper Series from European Central Bank
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. JEL Classification: C22, E32, E61
Keywords: business cycles; credit growth; financial crisis; GDP-at-risk; macroprudential policies (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-rmg
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Working Paper: Growth-and-Risk Trade-off (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202397
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