Predictable Financial Crises
Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.
Greenwood and Hanson gratefully acknowledge funding from the Division of Research at Harvard Business School. Sørensen gratefully acknowledges support from FRIC Center for Financial Frictions (grant no. DNRF102). We thank Matthew Baron, Xavier Gabaix, Jeremy Stein, Adi Sunderam, Emil Verner, and Wei Xiong as well as seminar participants at Harvard and Princeton for helpful comments, and Peggy Moreland for editorial assistance. We are grateful to Matthew Baron, Emil Verner, and Wei Xiong for generously sharing their data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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