The Great Mortgaging: Housing Finance, Crises, and Business Cycles

Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.

doi:10.2139/ssrn.2500610

Cited by 186 publications

(265 citation statements)

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“…Our paper follows the recent influential work by Jordà et al (2014a), Schularick and Taylor (2012), Jordà et al (2013), and Jordà et al (2014b) on the role of private debt in the macroeconomy. The authors put together long-run historical data for advanced economies to show that credit growth, especially mortgage credit growth, predicts financial crises (also see Dell'Ariccia et al (2012)).…”

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confidence: 74%

Household Debt and Business Cycles Worldwide

2015

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An increase in the household debt to GDP ratio in the medium run predicts lower subsequent GDP growth, higher unemployment, and negative growth forecasting errors in a panel of 30 countries from 1960 to 2012. Consistent with the "credit supply hypothesis," we show that low mortgage spreads predict an increase in the household debt to GDP ratio and a decline in subsequent GDP growth when used as an instrument. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries that face stricter monetary policy constraints as measured by a less flexible exchange rate regime, proximity to the zero lower bound, or more external borrowing. A rise in the household debt to GDP ratio is contemporaneously associated with a consumption boom followed by a reversal in the trade deficit as imports collapse. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt. The Great Recession has sparked new questions about the relation between household debt and the macroeconomy. Recent theoretical and empirical research recognizes that a sudden and large increase in household debt could lower subsequent output growth in the presence of monetary and fiscal policy constraints. Moreover, households may not internalize the macroeconomic effects of their own borrowing, making the economy susceptible to "excessive" credit growth. 1 However, empirical evidence on increases in household debt and subsequent economic performance is largely limited to the United States and the most recent global recession. A more systematic evaluation of the empirical relation between household debt and business cycles worldwide is needed in order to understand if recent events are representative of a broader pattern. This is important given the dramatic rise in household debt to GDP ratios over the last 50 years documented by Jordà et al. (2014a). This paper compiles data for 30 countries from 1960 to 2012 and provides several new results that highlight the importance of household credit shocks in driving business cycles worldwide.There are two broad hypotheses that relate household debt to business cycles. The "credit demand hypothesis" posits a positive relationship between current household borrowing and future income. Household borrowing in this view is driven by productivity or technology shocks that increase expected future income, spurring higher consumption and borrowing in anticipation. On the other hand, the "credit supply hypothesis" holds that higher household borrowing is driven by an expansion in the availability of credit. If there are plausible frictions such as nominal rigidities or monetary policy constraints, then households may borrow excessively which leads to an eventual slowdown in GDP growth.Distinguishing the credit demand and credit sup...

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confidence: 74%

Household Debt and Business Cycles Worldwide

2015

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“…The crucial role of debt in the 2007-2008 financial crisis (through the role of subprime loans) led to a reassessment of the role of household debt in the dynamics of financialization. Debt could be its major component all the more so as it contributes significantly to the regular bursting of financial bubbles (Jordà, Schularick, and Taylor 2014). The financialization of households can contribute to inequalities through several channels: the richest households, who can borrow at low cost, invest in more lucrative investments (Piketty 2014;Fligstein and Goldstein 2015;Denk and Cournède 2015), whereas low-income households, in order to maintain their standard of living, go into debt at high interest rates and pay high fees on loans that, through securitization, are held by the wealthiest households (Kumhof, Rancière, and Winant 2015).…”

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confidence: 99%

Financialization Is Marketization! A Study of the Respective Impacts of Various Dimensions of Financialization on the Increase in Global Inequality

Godechot¹

2016

SocScience

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Abstract:In this article, I study the impact of financialization on the rise in inequality in 18 OECD countries from 1970 to 2011 and measure the respective roles of various forms of financialization: the growth of the financial sector; the growth of one of its subcomponents, financial markets; the financialization of non-financial firms; and the financialization of households. I test these impacts using cross-country panel regressions in OECD countries. I show first that the share of the finance sector within the GDP is a substantial driver of world inequality, explaining between 20 and 40 percent of its increase from 1980 to 2007. When I decompose this financial sector effect, I find that this evolution was mainly driven by the increase in the volume of stocks traded in national stock exchanges and by the volume of shares held as assets in banks' balance sheets. By contrast, the financialization of non-financial firms and of households does not play a substantial role. Based on this inequality test, I therefore interpret financialization as being mainly a phenomenon of marketization, redefined as the growing amount of social energy devoted to the trade of financial instruments on financial markets.

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“…Concerns have also been raised that QE policies and associated low interest rates may lead to a further growth in the kind of unsustainable private debt and/or asset price booms that helped cause the 2008 crisis (Mian and Sufi 2010;Stein 2013;BIS 2014). This may be related to the finding reported in recent empirical studies that commercial banks, which monopolize the creation of credit and money in economies, are shifting their lending towards existing assets (in particular real estate) over non-financial business lending (Jordà et al 2014;Bezemer et al 2014).…”

Section: Introductionmentioning

confidence: 86%

“…18 Both of these assumptions are questionable. It has become clear that modern banks in advanced economies actually lend considerably more against existing assets, mainly real estate, than they to do non-financial firms (Jordà et al 2014;Bezemer et al 2014). Secondly, there is little evidence of a correlation between the quantity of base money or "loanable funds," or the short-term interest rate ("bankrate") that banks base their interbank lending rate on, and the quantity of credit created by the banking sector.…”

Section: Critiques Of the Nmc And Cbi Frameworkmentioning

confidence: 99%

Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75

Ryan-Collins

2015

SSRN Journal

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The Great Mortgaging: Housing Finance, Crises, and Business Cycles

Cited by 186 publications

References 20 publications

Household Debt and Business Cycles Worldwide

Household Debt and Business Cycles Worldwide

Financialization Is Marketization! A Study of the Respective Impacts of Various Dimensions of Financialization on the Increase in Global Inequality

Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75

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