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Home > Research > Staff Working Paper No. 659: Down in the slumps: the role of credit in five decades of recessions - Jonathan Bridges, Chris Jackson and Daisy McGregor
 

Staff Working Paper No. 659: Down in the slumps: the role of credit in five decades of recessions - Jonathan Bridges, Chris Jackson and Daisy McGregor

21 April 2017

​Staff Working Paper No. 659: Down in the slumps: the role of credit in five decades of recessions
Jonathan Bridges, Chris Jackson and Daisy McGregor

We investigate the role of private sector credit in shaping the severity of recessions. Using a sample of 130 downturns in 26 advanced economies since the 1970s, we assess whether the growth or level of credit is the better predictor of the severity of a recession. In addition to GDP we examine other metrics of severity, including unemployment and labour productivity. We find that a period of rapid credit growth in the immediate run-up to a recession predicts a deeper and longer downturn than when credit growth has been subdued, whether associated with a systemic banking crisis or not and whether that credit growth reflects borrowing by households or businesses. Credit growth is a more statistically and economically significant predictor of a recession’s severity than the level of indebtedness, though there is some evidence that the effect of a credit boom is greater when leverage is high. A build-up in credit predicts worse recessions in terms of lower GDP per capita, higher unemployment and lost labour productivity.

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