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Credit Booms Gone Bust:
Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008
by
Moritz Schularick and Alan M. Taylor
comments by
Carmen M. Reinhart,
University of Maryland, CEPR , and NBER
Federal Resrve Bank of San Francisco
March 5, 2010
Highlights of the results
Credit booms often end in tears—indeed
credit booms help predict financial crises.
In effect credit is the more robust predictor of
financial crisis after WWII.
The output costs of crises have remained large
in the post war period and their inflationary
consequences are greater.
Reactions (Part I)
This is a very promising line of research, which is grounded in
solid stylized facts. This paper makes contributions along
three dimensions:
1. Bringing the very relevant pre-war experience of advanced
economies to bear on the stylized facts.
2. Doing a horserace between a “monetarist” model and a
“credit-augmented monetarist” model of financial crises
prediction. (I would argue these predict different types of
crisis)
3. Suggesting (although in my view not presenting sufficient
evidence) that credit introduces its own shocks and it is not
merely an amplifier as in the financial accelerator BGG
model.
The paper also provides food for thought on possible
implications for the conduct of monetary policy and early
Reinhart
and Rogoff
3
warnings of financial crises
(more
on this later)
Some past and ongoing
examples of credit surges ahead
of financial crises…
Norway: Domestic Private Credit, 1900-2004
(Amount outstanding at year-end
as a percent of GDP)
180
160
140
120
100
First year of banking
crises
(black lines)
80
60
1900
1910
1920
1930
1940
1950
1960
1970
Reinhart
Reinhart
andand
Rogoff
Rogoff
(2010)
1980
1990
2000
5
Ireland Banking Survey: Domestic Credit and Banking
Crises, 1970-2008
(credit outstanding at end-of-period as a percent of GDP,
4-quarter moving average)
200
First year of
the banking
crisis
180
160
140
120
100
80
60
40
20
0
1970
1975
1980
1985
1990
Reinhart (2010)
1995
2000
2005
United Kingdom Banking Survey: Domestic Credit and
Banking Crises, 1970-2008
(credit outstanding at end-of-period as a percent of GDP,
4-quarter moving average)
First year of
banking crises
(black lines)
190
170
150
130
110
90
Coverage of domestic
credit series
expanded
70
50
30
1970
1975
1980
1985
1990
Reinhart (2010)
1995
2000
2005
Colombia Banking Survey: Domestic Credit and Banking
Crises, 1970-2008
(credit outstanding at end-of-period as a percent of GDP,
4-quarter moving average)
50
The 1998 banking cisis was
associated with the worst
recession recorded.
45
First year of
the banking
crises
(black lines)
Coverage of
domestic credit
series expanded
40
35
30
25
20
1970
1975
1980
1985
1990
Reinhart (2010)
1995
2000
2005
Malaysia Banking Survey: Domestic Credit and Banking
Crises, 1970-2008
(credit outstanding at end-of-period as a percent of GDP,
4-quarter moving average)
First year of
the banking crises
(black lines)
160
140
120
100
80
Domestic credit
aggregate expanded
coverage
60
40
20
1970
1975
1980
1985
1990
Reinhart (2010)
1995
2000
2005
Reactions (Part II) or what is missing
I. A selective chronology pertinent to the
credit cycle for the countries under
study.
Financial liberalization (importantly including the lifting of
capital account restrictions-more on this later)
Highlights from financial innovation (securitization of mortgages,
for example).
This may prove invaluable in identifying “credit-specific shocks”
and a role beyond the amplifier effect.
It will also help parse the post-war period into finer subperiods
and help the interpretation of some of the main results.
THERE IS MASSIVE FINANCIAL REPRESSION DURING
10
1946-EARLY 1980S
Reactions (Part II) or what is missing
II.
The “external connection” of the
domestic credit cycle
International capital flows “bonanzas” and external
debt surges prior to crises
The “sudden stop” problem a la Calvo
It may help in understanding the magnitudes of the
booms and subsequent busts (over an beyond
differences in pre war and post war monetary
policy responses.
Also why countries with very different monetary
frameworks have experienced similar cycles
(remember UK-Ireland slides)
Financial liberalization and the
sequencing of crises
Reinhart-Rogoff, 2008c
no clear sequence of
domestic versus
external default
Diaz-Alejandro's "goodby financial repression, hello financial crash"
stock and real
estate market
crashes--economic slowdown begins
Financial
Liberalization
Beginning
of banking
crisis
Currency
crash
Inflation
picks up
Peak
of banking
crisis
(if no default)
Default
on external
and/or
domestic debt
Inflation crisis
worsens
Peak of
banking crisis
(if default occurs)
Kaminsky-Reinhart "twin crises"
Capital controls introduced or increased
around this time
Reinhart and Rogoff (2009)
12
Banking crises
and capital mobility, 1800-2008
High 1
Capital Mobility and the Incidence of Banking Crisis: All Countries, 18002007
Share of Countries
in Banking Crisis, 3-year
Sum
(right scale)
0.9
1914
0.8
0.6
20
0.5
Percent
Ind ex
30
25
0.7
Capital Mobility
(left scale)
0.4
0.3
35
15
1825
1980
1860
10
0.2
1945
0.1
1918
Low 0
5
0
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Reinhart and Rogoff (2009)
Gross External Debt as a Percent of GDP: Averages for
Selected 59 Countries, 2003-2009
(in percent)
-30
Debt-to-GDP ratio
Change in debt-to-GDP ratio, 2003-2009
-10
10
30
50
0
50
100
150
200
250
Europe-Advanced
Europe-Emerging
United States
Australia & Canada
Asia-Emerging
Former Soviet Union
Increased
indebtedness
Japan
Africa
Asia (ex. Hong Kong)
Latin America
Deleveraging
Advanced economies
Emerging markets
Reinhart and Rogoff
14
United States: Private Capital Inflows from the United
Kingdom and Banking Crises, 1865-1914
(capital flows as a percent of exports)
30
Banking crises
(black lines)
25
20
15
10
5
0
1865
1870
1875
1880
1885
1890
Reinhart and Rogoff (2010)
1895
1900
15
15
Final thoughts on policy
The paper also provides food for thought on possible
implications for the conduct of monetary policy and early
warnings of financial crises.
If there is a greater emphasis or awareness of the behavior of
credit aggregates—should old and discarded tools of
monetary policy (in advanced economies) be revived?
Margin requirements to dampen booms and asset bubbles?
Ceilings on certain types of credit?
Countercyclical reserve requirements?
More heavy-handed enforcement of regulation and supervision?
Reinhart and Rogoff
16