Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

Moritz Schularick and Alan Taylor

No 15512, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The crisis of the advanced economies in 2008-09 has focused new attention on money and credit fluctuations, financial crises, and policy responses. We study the behavior of money, credit, and macroeconomic indicators over the long run based on a new historical dataset for 14 countries over the years 1870-2008, using the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates. We show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we demonstrate that credit growth is a powerful predictor of financial crises, suggesting that such crises are "credit booms gone wrong" and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly.

JEL-codes: E44 E51 E58 G01 G20 N10 N20 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-his, nep-mac and nep-mon
Note: DAE EFG IFM ME
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Citations: View citations in EconPapers (115)

Published as Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.

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Journal Article: Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008 (2012)
Working Paper: Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008 (2009)
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