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Do credit booms predict US recessions?

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  • Marius M. Mihai

Abstract

This paper investigates the role of bank credit in predicting US recessions since the 1960s in the context of a bivariate probit model. A set of results emerge. First, credit booms are shown to have strong positive effects in predicting declines in the business cycle at horizons ranging from 6 to 9 months. Second, I propose to isolate the effect of credit booms by identifying the contribution of excess bank liquidity alongside a housing factor in the downturn of each cycle. Third, the out‐of‐sample performance of the model is tested on the most recent credit‐driven recession: the Great Recession of 2008. The model performs better than a more parsimonious version where we restrict the effect of credit booms on the business cycle in the system to be zero.

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  • Marius M. Mihai, 2020. "Do credit booms predict US recessions?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(6), pages 887-910, September.
    • Handle: RePEc:wly:jforec:v:39:y:2020:i:6:p:887-910
    DOI: 10.1002/for.2662
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    2. Mihai, Marius M., 2022. "The commercial bank leverage factor in U.S. asset prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 156-171.
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    5. IIBOSHI, Hirokuni & IWATA, Yasuharu, 2023. "The Nexus between Public Debt and the Government Spending Multiplier: Fiscal Adjustments Matter," MPRA Paper 116347, University Library of Munich, Germany.

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