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

Various supply and demand effects may emerge due to the existence of transition- specific market imperfections which feature the economies undergoing transition from plan to market. In particular, corporate financial flows are seriously affected by the existence of “soft budget constraints”. Initially the term soft budget constraints was used by Kornai (1980) to denote paternalistic behavior on the part of the state in the ex-post bailing out of loss-making state-owned enterprises (SOEs) that found themselves in financial distress. Later, the concept was extended in different directions, in particular subsuming adverse selection in long-term banking lending under imperfect information when banks are. | FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES When Credit Bites Back Leverage Business Cycles and Crises Oscar Jorda Federal Reserve Bank of San Francisco and University of California Davis Moritz Schularick Free University of Berlin Alan M. Taylor University of Virginia NBER and CEPR October 2012 Working Paper 2011-27 http publications economics papers 2011 The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Banks of San Francisco and Atlanta or the Board of Governors of the Federal Reserve System. October 2012 When Credit Bites Back Leverage Business Cycles and Crises 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 leverage booms recessions financial crises business cycles local projections. JEL Codes C14 C52 E51 F32 F42 N10 N20. Oscar Jorda Federal Reserve Bank of San Francisco and University of California Davis e-mail ojorda@ Moritz Schularick Free University of Berlin e-mail .