TY - JOUR
T1 - Feedbacks
T2 - Financial markets and economic activity
AU - Brunnermeier, Markus
AU - Palia, Darius
AU - Sastry, Karthik A.
AU - Sims, Christopher A.
N1 - Publisher Copyright:
© 2021 American Economic Association. All rights reserved.
PY - 2021/6
Y1 - 2021/6
N2 - Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associated. “Financial stress” shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008-2009 crisis, but spreads improve within-crisis forecasts.
AB - Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associated. “Financial stress” shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008-2009 crisis, but spreads improve within-crisis forecasts.
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U2 - 10.1257/AER.20180733
DO - 10.1257/AER.20180733
M3 - Article
AN - SCOPUS:85100535669
SN - 0002-8282
VL - 111
SP - 1845
EP - 1879
JO - American Economic Review
JF - American Economic Review
IS - 6
ER -