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Macrofinancial History and the New Business Cycle Facts Workshop on - - PowerPoint PPT Presentation

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Macrofinancial History and the New Business Cycle Facts Workshop on Estimating and Interpreting Financial Cycles De Nederlandsche Bank, September 2, 2016 Disclaimer: The views expressed herein are solely the responsibility of the authors and

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SLIDE 1

Macrofinancial History and the New Business Cycle Facts

Òscar Jordà⋆ Moritz Schularick† Alan M. Taylor§

Workshop on Estimating and Interpreting Financial Cycles De Nederlandsche Bank, September 2, 2016

⋆Federal Reserve Bank of San Francisco; University of California, Davis

†University of Bonn; CEPR §University of California, Davis; NBER; CEPR

Disclaimer: The views expressed herein are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.

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Motivation

Key questions

Why a new collection of stylized facts? Need better models of real-financial interactions What do we know about the comovement of real and financial variables over the cycle? How have these relationships changed with financialization, especially since WW2?

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SLIDE 3

Contribution and takeaways

Contribution: New macrofinancial data set Takeaways: more credit and domestic cyclical behavior:

more credit: good and bad stable growth, but more disasters more procyclicality, less smoothing

more credit and the international economy:

lower relative domestic/international volatility but higher global risk less international diversification more EX-IM volatility, but less CA volatility

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SLIDE 4

A N M D

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SLIDE 5

What is new about the data?

17 advanced economies annual since 1870 25 real and nominal variables. New:

bank credit to non-financial sector: mortgages vs. non-mortgages; households vs. firms house prices equity prices

Remarks: many series available but scattered: now one source 100+ pages online appendix with sources soon paper, data, and appendix at www.nber.org

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SLIDE 6

Table 1: A new macro-financial dataset. Available samples per variable and per country

Country

  • R. GDP
  • N. GDP

Cons. Inv.

  • C. Acc.
  • Gov. Exp. Gov. Rev.

CPI

  • Nw. mon.
  • S. rate
  • L. rate

Stocks

  • Ex. rate
  • Pub. debt Bank lend. Mort. lend.

Australia 1870–2013 1870–2014 1901–2013 1870–1946 1870–2014 1902–2013 1902–2013 1870–2013 1870–2014 1870–1944 1870–2014 1870–2014 1870–2014 1870–2014 1870–1945 1870–1945 1949–2013 1948–2014 1948–2014 1952–2014 Belgium 1870–2013 1870–1913 1913–2013 1900–1913 1870–1913 1870–1912 1870–1912 1870–1914 1877–1913 1870–1914 1870–1912 1870–2013 1870–2014 1870–1913 1885–1913 1885–1913 1920–1939 1920–1939 1919–2014 1920–1939 1920–2014 1920–1939 1920–1940 1920–2014 1920–2014 1920–1939 1920–1940 1920–1939 1946–2014 1941 1941–2013 1945–2014 1947–2014 1946–1979 1950–2014 1950–2014 1943 1982–2014 1946–2014 Canada 1870–2013 1871–1938 1871–2013 1871–2014 1870–1945 1870–2014 1870–2014 1870–2014 1871–2014 1934–1944 1870–2014 1870–2014 1870–2014 1870–2014 1870–2013 1874–2013 1948–2014 1948–2014 1948–2014 Switzerland 1870–2013 1870–2014 1870–2013 1870–1913 1921–1939 1870–2013 1870–2013 1870–2014 1870–2014 1870–2014 1880–2014 1900–2014 1870–2014 1880–2014 1870–2013 1870–2013 1948–2014 1948–2014 Germany 1870–2013 1870–1944 1870–2013 1870–1913 1872–1913 1872–1913 1873–1915 1870–2014 1876–1913 1870–1914 1870–1921 1870–1914 1870–1944 1871–1913 1883–1920 1883–1919 1946–2014 1920–1939 1925–1938 1925–1938 1925–1938 1924–1938 1919–1922 1924–1943 1918–1922 1946–2014 1927–1943 1924–1940 1924–1940 1948–2014 1948–2014 1950–2013 1950–2013 1951–2011 1924–1944 1948–2014 1924–2014 1950–2008 1946–2013 1949–2013 1950–2014 Denmark 1870–2013 1870–2014 1870–2013 1870–1914 1874–1914 1870–1935 1870–1935 1870–2014 1870–1945 1875–2014 1870–2014 1914–2014 1870–2014 1880–1946 1870–2014 1875–2014 1922–2014 1921–2013 1937–2013 1954–2013 1950–2014 1953–1956 1960–1996 1998–2014 Spain 1870–2013 1870–2014 1870–2014 1870–2014 1870–1913 1870–1935 1870–1935 1880–2014 1874–1935 1883–1914 1870–1936 1870–2014 1870–2014 1880–1935 1900–1935 1904–1935 1931–1934 1940–2014 1940–2014 1941–2011 1920–2014 1940–2014 1940–2014 1946–2013 1946–2013 1940–2013 Finland 1870–2013 1870–2014 1870–2014 1870–2014 1870–2014 1882–2014 1882–2014 1870–2014 1870–2014 1870–2013 1870–1938 1912–2014 1870–2014 1914–2014 1870–2013 1927–2013 1948–2014 France 1870–2013 1870–1913 1870–2014 1870–1918 1870–1913 1870–2014 1870–2014 1870–2014 1870–1913 1870–1914 1870–2014 1870–2014 1870–2014 1880–1913 1900–1938 1870–1933 1920–1938 1920–1944 1919–1939 1920–2011 1920–2014 1922–2013 1920–1938 1946–2014 1946–2014 1950–2014 1946–2014 1948–2014 1949–2014 UK 1870–2013 1870–2014 1870–2013 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2013 1870–2014 1870–2014 1880–2013 1880–2013 Italy 1870–2013 1870–2014 1870–2013 1870–2013 1870–2013 1870–2014 1870–2014 1870–2013 1870–2014 1885–1914 1870–2014 1906–2013 1870–2014 1870–2014 1870–2014 1870–2014 1922–2014 Japan 1870–2013 1875–1944 1874–2013 1885–1944 1870–1944 1870–2013 1870–2013 1870–2014 1873–2014 1879–1938 1870–2014 1900–2013 1870 1875–1944 1874–2014 1893–1940 1946–2013 1946–2014 1946–2013 1957–2014 1873–2014 1946–2014 1946–2014 Netherlands 1870–2013 1870–1913 1870–2013 1870–1913 1870–1913 1870–2014 1870–2013 1870–2013 1870–1941 1870–1914 1870–2013 1890–1944 1870–2014 1870–1939 1900–2013 1900–2013 1921–1939 1921–1939 1921–1939 1945–2014 1919–1944 1946–2014 1946–2014 1945–2014 1948–2014 1948–2013 1948–2014 Norway 1870–2013 1870–1939 1870–2013 1870–1939 1870–1939 1870–2014 1870–1943 1870–2014 1870–2014 1870–1965 1870–2013 1914–2014 1870–2014 1880–1939 1870–2014 1870–2013 1946–2013 1946–2013 1946–2013 1949–2014 1967–2015 1947–2013 Portugal 1870–2013 1870–2014 1910–2013 1953–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1880–2014 1870–2013 1929–2013 1870–2014 1870–2014 1870–1903 1920–2013 1920–2013 Sweden 1870–2013 1870–2014 1870–2013 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1871–2013 1870–2013 1870–2014 1870–2014 1870–2014 1870–2014 1871–2013 1871–2013 USA 1870–2013 1870–2014 1870–2013 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1870–2014 1880–2014 1880–2014

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SLIDE 7

T F H S

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SLIDE 8

The Great Leveraging

And the incidence of financial crises

Total loans Broad money 2 4 6 8 Number of 17 countries in crisis .2 .4 .6 .8 1 1.2 Ratio of bank lending to GDP 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 8/28

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SLIDE 9

The Great Mortgaging

Nonmortgage lending Mortgage lending .2 .4 .6 .8 Ratio of bank lending to GDP 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 9/28

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SLIDE 10

The housing hockey stick

Real house prices

.5 1 1.5 2 Real house prices 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 10/28

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SLIDE 11

Owner occupied share of housing

in percent

CAN GER FRA ITA CHE U.K. U.S. Avg. 1900 47 1910 46 1920 23 46 1930 48 1940 57 32 44 1950 66 39 38 40 37 32 47 43 1960 66 34 41 45 34 42 62 46 1970 60 36 45 50 29 50 63 48 1980 63 39 47 59 30 58 64 51 1990 63 39 55 67 31 68 64 55 2000 66 45 56 80 35 69 67 60 2013 69 45 58 82 37 64 65 60

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SLIDE 12

Leveraging whichever way you measure it

Average: U.S., U.K., Germany, and France

Total lending, total wealth

0.00 1.00 2.00 3.00 4.00 5.00 6.00 0.00 0.25 0.50 0.75 1.00 1.25 1950 1970 1990 2010 Loans/GDP Loans/Wealth Wealth/GDP (right axis)

Mortgages, housing wealth

0.00 0.50 1.00 1.50 2.00 2.50 3.00 0.00 0.25 0.50 0.75 1.00 1.25 1950 1970 1990 2010 Mortgages/GDP Mortgages/Housing Wealth Housing Wealth/GDP (right axis)

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SLIDE 13

B . F C

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SLIDE 14

Expansions and Recessions

Duration and average annual rate of change of cyclical phase

Expansions Recessions

Full Pre-WW2 Post-WW2 Full Pre-WW2 Post-WW2

Duration (years) 5.1 3.1 8.6 1.5 1.6 1.4 (5.5) (2.7) (7.2) (0.9) (1.0) (0.8) Rate (% p.a) GDP 3.7 4.1 3.0

  • 2.5
  • 2.9
  • 1.7

(2.3) (2.5) (1.7) (2.5) (2.8) (1.5) Credit 4.6 4.7 4.5 2.2 3.7 0.0 (10) (13) (4.3) (8.0) (8.9) (5.7) p-value H0 : GDP = Credit 0.10 0.46 0.00 0.00 0.00 0.00 Observations 315 203 112 323 209 114

Concordance index (GDP vs. Credit Cycles): Pre-WW2: 0.61 Post-WW2: 0.79

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SLIDE 15

Borrow in the expansion, delever in the recession

Credit: the good, the bad, and the net. Unconditional. Post-WW2 sample

Cumulative change in real GDP p.c. over cyclical phase Expansion Recession Net change High Low High Low Total ∆ ∆ p.a. Borrow in expansion 29% 19.2%

  • 3.23%
  • 1.9%

8.5% 0.7% Delever in recession 17% 30.5%

  • 2.5%
  • 2.4%

13.4% 1.1% H/L credit business cycles are not state dependent: transition probabilities = 0.5

High credit expansion Rapid deleveraging recession expansion gain now similar recession now deeper recession after expansion gain after net 8.5% gain (0.7% p.a.) net 13.4% gain (1.1% p.a.)

Next: conditional analysis, rare disasters, ...

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SLIDE 16

B C M

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SLIDE 17

The era of finance: summary of key insights

Domestic economy

Key domestic moments correlate with higher credit (particularly since WW2): more leverage, slower growth in real per capita

  • utput, consumption, investment, ...

volatility declines, but more negative skew, and worse disasters (10th percentile) higher correlation of consumption and investment with output: higher pro-cyclicality, less smoothing higher correlation of real variables with real credit

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Finance and growth

Full sample

1 1.5 2 2.5 3 3.5 Mean .2 .4 .6 .8 1 Credit/GDP

(a) GDP

1 1.5 2 2.5 3 3.5 Mean .2 .4 .6 .8 1 Credit/GDP

(b) Consumption

1 2 3 4 5 6 Mean .2 .4 .6 .8 1 Credit/GDP

(c) Investment

Post-WW2

1 2 3 4 Mean .5 1 1.5 Credit/GDP

(a) GDP

1 2 3 4 Mean .5 1 1.5 Credit/GDP

(b) Consumption

  • 2

2 4 6 Mean .5 1 1.5 Credit/GDP

(c) Investment Binscatters on credit/GDP ratio using 10–year rolling windows (country fixed-effects absorbed) 18/28

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SLIDE 19

More credit, more stability, more disaster risk

Post-WW2

(a) GDP (b) Consumption (c) Investment

1 1.5 2 2.5 3 S.D. .5 1 1.5 Credit/GDP

  • .8 -.6 -.4 -.2

.2 Skewness .5 1 1.5 Credit/GDP

  • 2 -1.5 -1 -.5 0 .5 1

10th percentile .5 1 1.5 Credit/GDP 1 1.5 2 2.5 3 S.D. .5 1 1.5 Credit/GDP

  • .8 -.6 -.4 -.2

.2 Skewness .5 1 1.5 Credit/GDP

  • 2 -1.5 -1 -.5 0 .5 1

10th percentile .5 1 1.5 Credit/GDP 5 6 7 8 9 S.D. .5 1 1.5 Credit/GDP

  • .8 -.6 -.4 -.2

.2 Skewness .5 1 1.5 Credit/GDP

  • 9
  • 8
  • 7
  • 6
  • 5
  • 4

10th percentile .5 1 1.5 Credit/GDP

Binscatters on credit/GDP ratio using 10–year rolling windows (Country fixed effects absorbed) 19/28

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SLIDE 20

Credit more correlated with economic activity

Full sample

.1 .2 .3 .4 .5 .6 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(a) GDP-credit

.1 .2 .3 .4 .5 .6 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(b) Consumption-credit

.1 .2 .3 .4 .5 .6 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(c) Investment-credit

Binscatters on credit/GDP ratio using 10–year rolling windows (country fixed effects absorbed) 20/28

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SLIDE 21

More credit, higher pro-cyclicality, less diversification

Full sample

.1 .2 .3 .4 .5 .6 .7 .8 .9 1 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(a) GDP-consumption

.1 .2 .3 .4 .5 .6 .7 .8 .9 1 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(b) GDP-investment

Binscatters on credit/GDP ratio using 10–year rolling windows (country fixed-effects absorbed) 21/28

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SLIDE 22

I M

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SLIDE 23

The era of finance: summary of key insights

International economy

Key international moments correlate with higher credit: volatility declines:

lower relative domestic consumption-output volatility lower domestic consumption-world output volatility

global risk increases: higher world output volatility diversification declines: correlations of (1) domestic

  • utput, (2) consumption, (3) investment, and (4)

credit vs. world output increase current account/GDP volatility/comovement declines but X/M volatility/comovement increase

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SLIDE 24

Consumption volatility declines relative to domestic/international output

But more global instability. Full sample

.8 1 1.2 1.4 1.6 1.8 2 SD (c)/SD(Y) .2 .4 .6 .8 1 1.2 Credit/GDP .5 1 1.5 2 2.5 3 3.5 4 4.5 SD (c)/SD(YW) .2 .4 .6 .8 1 1.2 Credit/GDP .8 1 1.2 1.4 1.6 1.8 2 SD(YW) .2 .4 .6 .8 1 1.2 Credit/GDP

Binscatters on credit/GDP ratio using 10–year rolling windows (country fixed-effects absorbed) 24/28

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SLIDE 25

More leverage, less international diversification

Full sample

.1 .2 .3 .4 .5 .6 .7 .8 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(a) GDP, local-world

.1 .2 .3 .4 .5 .6 .7 .8 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(b) Consumption, local-world

.1 .2 .3 .4 .5 .6 .7 .8 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(c) Investment, local-world

.1 .2 .3 .4 .5 .6 .7 .8 Correlation .2 .4 .6 .8 1 1.2 Credit/GDP

(d) Credit, local-world

Binscatters on credit/GDP ratio using 10–year rolling windows (country fixed-effects absorbed) 25/28

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SLIDE 26

Leverage and the instability of trade

Full sample

1 1.5 2 2.5 S.D. .2 .4 .6 .8 1 1.2 Credit/GDP

  • .8-.6-.4-.2 0 .2 .4 .6

Skewness .2 .4 .6 .8 1 1.2 Credit/GDP

  • .4
  • .3
  • .2
  • .10.1.2.3.4.5.6.7
  • Corr. with GDP

.2 .4 .6 .8 1 1.2 Credit/GDP

(a) CA/GDP

1 1.5 2 2.5 S.D. .2 .4 .6 .8 1 1.2 Credit/GDP

  • .8-.6-.4-.2 0 .2 .4 .6

Skewness .2 .4 .6 .8 1 1.2 Credit/GDP

  • .4
  • .3
  • .2
  • .10.1.2.3.4.5.6.7
  • Corr. with GDP

.2 .4 .6 .8 1 1.2 Credit/GDP

(b) Exports/GDP

1 1.5 2 2.5 S.D. .2 .4 .6 .8 1 1.2 Credit/GDP

  • .8-.6-.4-.2 0 .2 .4 .6

Skewness .2 .4 .6 .8 1 1.2 Credit/GDP

  • .4
  • .3
  • .2
  • .10.1.2.3.4.5.6.7
  • Corr. with GDP

.2 .4 .6 .8 1 1.2 Credit/GDP

(c) Imports/GDP

Binscatters on credit/GDP ratio using 10–year rolling windows (country fixed-effects absorbed) 26/28

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SLIDE 27

C

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SLIDE 28

Implications

corporate vs. household balance sheets: Bernanke, Gertler and Gilchrist (1999) vs. Iacoviello (2005) reinforces micro-evidence on household channel: Mian and Sufi (2013, 2014) deleveraging and demand shortfalls: Eggertson and Krugman (2012); Korinek and Simsek (2016) volatility and the demand for safe assets: Caballero, Fahri and Gourinchas (2008) and Caballero and Krishnamurthy (2009) non-linear effects of leverage (vol. vs. disaster risk trade-off): Brunnermeier and Sannikov (2014); Adrian and Boyarchenko (2015)

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