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.
Working Paper
When Credit Bites Back: Leverage, Business Cycles and Crises
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This paper studies the role of credit in the business cycle, with a focus on private credit overhang.
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- WP20-Taylor-et-al-Credit-Bites-Back (pdf, 648.69 KB)
- C1 Econometric and Statistical Methods and Methodology: General
- C14 Semiparametric and Nonparametric Methods: General
- C5 Econometric Modeling
- C52 Model Evaluation, Validation, and Selection
- E5 Monetary Policy, Central Banking, and the Supply of Money and Credit
- E51 Money Supply • Credit • Money Multipliers
- F4 Macroeconomic Aspects of International Trade and Finance
- F42 International Policy Coordination and Transmission
- N1 Macroeconomics and Monetary Economics • Industrial Structure • Growth • Fluctuations
- N10 General, International, or Comparative
- N2 Financial Markets and Institutions
- N20 General, International, or Comparative
