Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons

Do external imbalances increase the risk of financial crises? This paper studies the experience of 14 developed countries over 140 years (1870-2008). It exploits the long-run data set in a number of different ways. First, the paper applies new statistical tools to describe the temporal and spatial p...

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Bibliographic Details
Published in:IMF economic review 2011-06, Vol.59 (2), p.340-378
Main Authors: JORDÀ, ÒSCAR, SCHULARICK, MORITZ, TAYLOR, ALAN M.
Format: Article
Language:English
Subjects:
20th century
Analysis
Business cycles
C14
C52
Capital Markets
Capital mobility
Charge accounts
Countries
Credit
Datasets
Developing countries
E51
Economic aspects
Economic conditions
Economic crises
Economic crisis
Economic growth rate
Economic history
Economic models
Economic Policy
Economic recessions
Economic statistics
Economic theory
Economics
Economics and Finance
Economics, International
Emerging markets
F32
F42
Finance
Financial risk
Forecasts and trends
Global recessions
Gross domestic product
Interest rates
International Economics
International finance
International monetary fund
LDCs
Loans
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
N10
N20
Recessions
Regulation of financial institutions
Studies
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Summary:Do external imbalances increase the risk of financial crises? This paper studies the experience of 14 developed countries over 140 years (1870-2008). It exploits the long-run data set in a number of different ways. First, the paper applies new statistical tools to describe the temporal and spatial patterns of crises and identifies five episodes of global financial instability in the past 140 years. Second, it studies the macroeconomic dynamics before crises and shows that credit growth tends to be elevated and short-term interest rates depressed relative to the "natural rate" in the run-up to global financial crises. Third, the paper shows that recessions associated with crises lead to deeper slumps and stronger turnarounds in imbalances than during normal recessions. Finally, the paper asks to what extent external imbalances help predict financial crises. The overall result is that credit growth emerges as the single best predictor of financial instability. External imbalances have played an additional role, but more so in the pre-WWII era of low financialization than today.
ISSN:2041-4161
2041-417X
DOI:10.1057/imfer.2011.8