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How credit cycles across a financial crisis

Author: Arvind Krishnamurthy; Tyler Muir; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2017.
Series: Working paper series (National Bureau of Economic Research), no. 23850.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We study the behavior of credit and output across a financial crisis cycle using information from credit spreads. We show the transition into a crisis occurs with a large increase in credit spreads, indicating that crises involve a dramatic shift in expectations and are a surprise. The severity of the subsequent crisis can be forecast by the size of credit losses (change in spreads) coupled with the fragility of the  Read more...
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Genre/Form: History
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Arvind Krishnamurthy; Tyler Muir; National Bureau of Economic Research,
OCLC Number: 1005670029
Notes: "September 2017"
Description: 1 online resource (53 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 23850.
Responsibility: Arvind Krishnamurthy, Tyler Muir.

Abstract:

We study the behavior of credit and output across a financial crisis cycle using information from credit spreads. We show the transition into a crisis occurs with a large increase in credit spreads, indicating that crises involve a dramatic shift in expectations and are a surprise. The severity of the subsequent crisis can be forecast by the size of credit losses (change in spreads) coupled with the fragility of the financial sector (as measured by pre-crisis credit growth), and we document that this interaction is an important feature of crises. We also find that recessions in the aftermath of financial crises are severe and protracted. Finally, we find that spreads fall pre-crisis and appear too low, even as credit grows ahead of a crisis. This behavior of both prices and quantities suggests that credit supply expansions are a precursor to crises. The 2008 financial crisis cycle is in keeping with these historical patterns surrounding financial crises.

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