Feedbacks: Financial markets and economic activity

Markus Brunnermeier, Darius Palia, Karthik A. Sastry, Christopher A. Sims

Research output: Contribution to journalArticlepeer-review

31 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)1845-1879
Number of pages35
JournalAmerican Economic Review
Issue number6
StatePublished - Jun 2021

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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