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Journal ArticleDOI

When Credit Bites Back

01 Dec 2013-Journal of Money, Credit and Banking (John Wiley & Sons, Ltd)-Vol. 45, pp 3-28
TL;DR: The authors used data on 14 advanced countries between 1870 and 2008 to study how past credit accumulation impacts key macroeconomic variables such as output, investment, lending, interest rates, and inflation, finding that more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries.
Abstract: Using data on 14 advanced countries between 1870 and 2008 we document two key facts of the modern business cycle: relative to typical recessions, financial crisis recessions are costlier, and more credit-intensive expansions tend to be followed by deeper recessions (in financial crises or otherwise) and slower recoveries. We use local projection methods to condition on a broad set of macro-economic controls to study how past credit accumulation impacts key macro-economic variables such as output, 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.

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Citations
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Journal ArticleDOI
TL;DR: Bekaert et al. as mentioned in this paper introduced SRISK, a measure to measure the systemic risk contribution of a financial firm, which is a function of its size, leverage and risk.
Abstract: We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. We use the measure to study top financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns, and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.Received June 7, 2011; accepted April 18, 2016 by Editor Geert Bekaert.

592 citations

Journal ArticleDOI
TL;DR: This article used the penalty function approach within the SVAR framework to examine the interaction between financial conditions and economic uncertainty and trace out the impact of these two types of shocks on the economy.

372 citations

Journal ArticleDOI
TL;DR: The authors showed that austerity is always a drag on growth, and especially so in depressed economies: a 1% of GDP fiscal consolidation translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than just 1.8% in a boom.
Abstract: After the Global Financial Crisis, a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is unsettled, mired by the difficulty of identifying multipliers from observational data. This article, reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a 1% of GDP fiscal consolidation translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than just 1.8% in a boom.

316 citations


Cites background from "When Credit Bites Back"

  • ...The Jordà, Schularick, and Taylor (2013) path is for real GDP per capita, extended to a 6-year horizon, adjusted by +0.65% per year given the UK rate of population growth....

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Journal ArticleDOI
TL;DR: This article found that an increase in the household debt to GDP ratio predicts lower GDP growth and higher unemployment in the medium run for an unbalanced panel of 30 countries from 1960 to 2012.
Abstract: An increase in the household debt to GDP ratio predicts lower GDP growth and higher unemployment in the medium run for an unbalanced panel of 30 countries from 1960 to 2012. Low mortgage spreads are associated with an increase in the household debt to GDP ratio and a decline in subsequent GDP growth, highlighting the importance of credit supply shocks. Economic forecasters systematically over-predict GDP growth at the end of household debt booms, suggesting an important role of flawed expectations formation. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries with less flexible exchange rate regimes. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.

293 citations

Journal ArticleDOI
TL;DR: In this article, the authors introduce SRISK to measure the systemic risk contribution of a financial firm, which measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk.
Abstract: We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. We use the measure to study top US financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.

263 citations

References
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Book
Hyman P. Minsky1
01 Jan 1986
TL;DR: In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today as mentioned in this paper, explaining why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns and why the economy is now undergoing a credit crisis that he foresaw.
Abstract: "Mr. Minsky long argued markets were crisis prone. His 'moment' has arrived." -The Wall Street Journal In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today. He explains why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns-and why the economy is now undergoing a credit crisis that he foresaw. Stabilizing an Unstable Economy covers: The natural inclination of complex, capitalist economies toward instability Booms and busts as unavoidable results of high-risk lending practices "Speculative finance" and its effect on investment and asset prices Government's role in bolstering consumption during times of high unemployment The need to increase Federal Reserve oversight of banks Henry Kaufman, president, Henry Kaufman & Company, Inc., places Minsky's prescient ideas in the context of today's financial markets and institutions in a fascinating new preface. Two of Minsky's colleagues, Dimitri B. Papadimitriou, Ph.D. and president, The Levy Economics Institute of Bard College, and L. Randall Wray, Ph.D. and a senior scholar at the Institute, also weigh in on Minsky's present relevance in today's economic scene in a new introduction. A surge of interest in and respect for Hyman Minsky's ideas pervades Wall Street, as top economic thinkers and financial writers have started using the phrase "Minsky moment" to describe America's turbulent economy. There has never been a more appropriate time to read this classic of economic theory.

3,031 citations


"When Credit Bites Back" refers background in this paper

  • ...…The data support the idea that financial factors play an important role in the modern business cycle, as exemplified in the work of Fisher (1933), Minsky (1986), Bernanke and Gertler (1990)—or, more recently, Battacharya et al. (2011), Adrian and Shin (2012), Eggertsson and Krugman (2012), or…...

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Posted Content
TL;DR: The long-awaited monetary history of the United States by Friedman and Schwartz is in every sense of the term a monumental scholarly achievement -monumental in its sheer bulk, monumental in definitiveness of its treatment of innumerable issues, large and small... monumental, above all, in the theoretical and statistical effort and ingenuity that have been brought to bear on the solution of complex and subtle economic issues as discussed by the authors.
Abstract: Writing in the June 1965 issue of theEconomic Journal, Harry G. Johnson begins with a sentence seemingly calibrated to the scale of the book he set himself to review: "The long-awaited monetary history of the United States by Friedman and Schwartz is in every sense of the term a monumental scholarly achievement--monumental in its sheer bulk, monumental in the definitiveness of its treatment of innumerable issues, large and small . . . monumental, above all, in the theoretical and statistical effort and ingenuity that have been brought to bear on the solution of complex and subtle economic issues." Friedman and Schwartz marshaled massive historical data and sharp analytics to support the claim that monetary policy--steady control of the money supply--matters profoundly in the management of the nation's economy, especially in navigating serious economic fluctuations. In their influential chapter 7, The Great Contraction--which Princeton published in 1965 as a separate paperback--they address the central economic event of the century, the Depression. According to Hugh Rockoff, writing in January 1965: "If Great Depressions could be prevented through timely actions by the monetary authority (or by a monetary rule), as Friedman and Schwartz had contended, then the case for market economies was measurably stronger." Milton Friedman won the Nobel Prize in Economics in 2000 for work related to A Monetary History as well as to his other Princeton University Press book, A Theory of the Consumption Function (1957).

1,901 citations

Journal ArticleDOI
TL;DR: In this article, the authors introduce methods to compute impulse responses without specification and estimation of the underlying multivariate dynamic system by estimating local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is done with VARs.
Abstract: This paper introduces methods to compute impulse responses without specification and estimation of the underlying multivariate dynamic system The central idea consists in estimating local projections at each period of interest rather than extrapolating into increasingly distant horizons from a given model, as it is done with vector autoregressions (VAR) The advantages of local projections are numerous: (1) they can be estimated by simple regression techniques with standard regression packages; (2) they are more robust to misspecification; (3) joint or point-wise analytic inference is simple; and (4) they easily accommodate experimentation with highly non-linear and flexible specifications that may be impractical in a multivariate context Therefore, these methods are a natural alternative to estimating impulse responses from VARs Monte Carlo evidence and an application to a simple, closed-economy, new-Keynesian model clarify these numerous advantages

1,761 citations

Posted Content
TL;DR: In this article, the authors present a new database on the timing of systemic banking crises and policy responses to resolve them, with detailed data on crisis containment and resolution policies for 42 crisis episodes, including currency crises and sovereign debt crises.
Abstract: This paper presents a new database on the timing of systemic banking crises and policy responses to resolve them. The database covers the universe of systemic banking crises for the period 1970-2007, with detailed data on crisis containment and resolution policies for 42 crisis episodes, and also includes data on the timing of currency crises and sovereign debt crises. The database extends and builds on the Caprio, Klingebiel, Laeven, and Noguera (2005) banking crisis database, and is the most complete and detailed database on banking crises to date.

1,551 citations


"When Credit Bites Back" refers background in this paper

  • ...Our event classification for the 1870–1960 period follows the same definition of “systemic” banking crisis in Laeven and Valencia (2008) for the post-1960 period, maintaining consistency with contemporary approaches....

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Journal ArticleDOI
TL;DR: This article studied 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 and found that credit growth is a powerful predictor of financial crises, suggesting that policymakers ignore credit at their peril.
Abstract: The financial crisis has refocused 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. Total credit has increased strongly relative to output and money in the second half of the twentieth century. Monetary policy responses to financial crises have also been more aggressive, but the output costs of crises have remained large. Credit growth is a powerful predictor of financial crises, suggesting that policymakers ignore credit at their peril. (JEL E32, E44, E52, G01, N10, N20)

1,451 citations