2017-23 | September 2017
Leading up to the Great Recession, the U.S. economy experienced a massive expansion of credit, a slowdown in productivity growth, and a rapid increase in income inequality. All of these developments may have contributed to an unusual buildup of financial instability. This paper explores the contribution of each of these three developments in explaining financial crises using long-run historical data for 17 advanced economies. Previous research showed that credit growth is a robust predictor of financial fragility. I find that changes in top income shares and productivity growth are strong early warning indicators as well. In fact, changes in top income shares outperform credit as crises predictors. Moreover, financial recessions that are preceded by strong increases in income inequality or low productivity growth are also associated with deeper and slower recoveries. Overall, the results indicate that both the productive capacity of an economy and the distribution of income matter for financial stability.
2017-22 | November 2017
Financial crises are born out of prolonged credit booms and depressed productivity. At times, they are initiated by relatively small shocks. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term defaultable loans, and occasional financial crises. Within this framework, crises are typically preceded by prolonged boom periods. During such episodes, intermediaries expand their lending and leverage, thereby building up financial fragility. Crises are generally initiated by a moderate adverse shock that puts pressure on intermediaries’ balance sheets, triggering a creditor run, a contraction in new lending, and ultimately a deep and persistent recession.
2017-09 | January 2018
This paper studies how monetary policy jointly affects asset prices and the real economy in the United States. To this end, I develop an estimator that uses high-frequency surprises as a proxy for the structural monetary policy shocks. This is achieved by integrating the surprises into a vector autoregressive model as an exogenous variable. I show analytically that this approach identifies the true relative impulse responses. When allowing for time-varying model parameters, I find that, compared to output, the response of stock and house prices to monetary policy shocks was particularly low before the 2007-09 financial crisis.