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About the Author(s)

180x250 Raghuram Rajan

Raghuram Rajan is the Katherine Dusak Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business. He served as the 23rd Governor of the Reserve Bank of India between September 2013 and September 2016, and was a chief economist and director of research at the International Monetary Fund 2003-06. He delivered the 2018 Martin Feldstein Lecture, based on this article, at the NBER Summer Institute on July 10, 2018. The lecture was named in honor of the NBER's president emeritus.


1. The Financial Conditions Index, presented in the IMF's Global Financial Stability Report, is a composite of short-term rates, long-term real rates, term spread, corporate spread, interbank spread, equity price growth, equity return volatility, credit to GDP, credit growth, and house price growth.   Go to ⤴︎
2. A. Maddaloni and J. Peydró, "Bank Risk-Taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro Area and the U.S. Lending Standards," European Central Bank Working Paper 1248, 2010, pp. 2121–65.   Go to ⤴︎
3. C. Borio and P. Lowe, "Asset Prices, Financial and Monetary Stability: Exploring the Nexus," BIS Working Paper  114, 2002. Go to ⤴︎
4. A. Krishnamurthy and T. Muir, "How Credit Cycles Across a Financial Crisis," Stanford Graduate School of Business Working Paper, 2017.   Go to ⤴︎
5. D. López-Salido, J. Stein, and E. Zakrajšek, "Credit-Market Sentiment and the Business Cycle," Quarterly Journal of Economics, 132(3), 2017, pp. 1373–1426.   Go to ⤴︎
6. A. Mian, A. Sufi, and E. Verner, "Household Debt and Business Cycles Worldwide," Quarterly Journal of Economics, 132(4), 2017, pp. 1755–1817.   Go to ⤴︎
7. R. Rajan, "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," Quarterly Journal of Economics, 109(2), 1994, pp. 399–441.   Go to ⤴︎
8. N. Gennaioli, A. Shleifer, and R. Vishny, "Neglected Risks: The Psychology of Financial Crises," American Economic Review, 105(5), 2015, pp. 310–14.   Go to ⤴︎
9. J. Geanakoplos, "The Leverage Cycle," NBER Macroeconomics Annual 2009, 24(1), 2010, pp. 1–65, . Go to ⤴︎
10. D. Diamond, Y. Hu, and R. Rajan, "Pledgeability, Industry Liquidity, and Financing Cycles," NBER Working Paper 23055, January 2017. Go to ⤴︎
11. A. Shleifer and R. Vishny, "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, 47(4), 1992, pp. 1343–66.   Go to ⤴︎
12. For the interested reader, related recent papers include: V. Acharya and S. Viswanathan, "Leverage, Moral Hazard, and Liquidity," Journal of Finance, 66(1), 2011, pp. 99–138; J. Dow, G. Gorton, and A. Krishnamurthy, "Equilibrium Investment and Asset Prices Under Imperfect Corporate Control," American Economic Review, 95(3), 2005, pp. 659–81; and A. Eisfeldt and A. Rampini, "Managerial Incentives, Capital Reallocation, and the Business Cycle," Journal of Financial Economics, 87(1), 2008, pp. 177–99.   Go to ⤴︎
13. P. Lisowsky, M. Minnis, and A. Sutherland, "Economic Growth and Financial Statement Verification," Journal of Accounting Research, 55(4), 2017, pp. 745–94.   Go to ⤴︎
14. D. Diamond and R. Rajan, "Fear of Fire Sales, Illiquidity Seeking, and the Credit Freeze," Quarterly Journal of Economics, 126(2), 2011, pp. 557–91. Go to ⤴︎
15. F. Allen and D. Gale, "Limited Market Participation and Volatility of Asset Prices," American Economic Review, 84(4), 1994, pp. 933–55. Go to ⤴︎
16. M. Jensen and W. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure," Journal of Financial Economics, 3(4), 1976, pp. 305–60.   Go to ⤴︎
17. S. Myers, "Determinants of Corporate Borrowing," Journal of Financial Economics, 5(2), 1977, pp. 147–75.   Go to ⤴︎
18. D. Diamond and R. Rajan, "Illiquid Banks, Financial Stability, and Interest Rate Policy," Journal of Political Economy, 120(3), pp. 552–9,   Go to ⤴︎
19. E. Farhi and J. Tirole, "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, 102(1), 2012, pp. 60–93. Go to ⤴︎

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