Curbing the Credit Cycle


  • This is a revised version of an earlier article prepared for the Columbia University Center on Capitalism and Society Annual Conference, November 2010. We are grateful to the editor, Wouter den Haan, two anonymous referees and to Piergiorgio Alessandri, Richard Barwell, Salina Ladha, Roland Meeks, Victoria Saporta, Misa Tanaka, Alan Taylor, seminar participants at the Columbia University Center on Capitalism and Society, the Central Bank of Turkey and Maryland University for comments on earlier versions. Thanks to Vijay Balle and Clare Rogowski for excellent research assistance and to Moritz Schularick and Alan Taylor for making their data available to us. Disclaimer: opinions expressed in this work are those of the authors, and do not necessarily reflect those of the Bank of England, the MPC or the FPC.


Credit cycles have been a characteristic of advanced economies for over 100 years. On average, a sustained pick-up in the ratio of credit to GDP has been highly correlated with banking crises. The boom phases of the cycle are characterised by large deviations in credit from trend. A range of mechanisms can generate these effects, each of which has strategic complementarity between banks at its core. Macro-prudential policy could curb these credit cycles, both through raising the cost of maintaining risky portfolios and through an expectations channel that operates via banks' perceptions of other banks' actions.