Credit supply growth drives business cycle fluctuations and often sows the seeds of their own subsequent destruction.

Fiona Sydney

2018-04-26 07:37:00 Thu ET

Credit supply growth drives business cycle fluctuations and often sows the seeds of their own subsequent destruction. The global financial crisis from 2008 to 2009 suggests that we can predict a key slowdown in real economic activity by tracking incremental household debt accumulation. In both America and 30 other countries, changes in household debt-to-GDP ratios from 2002 to 2007 significantly correlate with increases in unemployment from 2007 to 2010.

From this empirical perspective, credit supply expansions, rather than permanent income or technology shocks, serve as a major driver of real business cycles over time. Most macro models attribute macroeconomic fluctuations to real factors such as exogenous productivity shocks. In contrast, financial intermediaries can play an important role in aggregate credit supply growth, household leverage, employment, and asset valuation. Credit supply expansions affect the real economy by boosting household demand, rather than the productive capacity of firms.

In fact, credit booms tend to precede higher inflation and employment in retail and construction (but not in the tradable or export-driven business sector). The key real economy slowly adjusts to the precipitous decrease in consumer expenditures due to high household leverage when credit supply slows down in major financial crises.

Even when short-term interest rates decline to zero, savers cannot spend enough to make up for the shortfall in aggregate demand. Also, employment cannot readily gravitate from the non-tradable sector to the tradable sector. Key nominal rigidities, sluggish price adjustments, and other legacy distortions render post-credit-boom recessions more severe. What triggers credit supply growth involves a major influx of capital in the financial system.

In this light, both monetary and fiscal stimulus can have a major impact on the real economy via credit supply growth, household debt, stock and bond prices, and real business cycles. Overall, financial stability serves as a core precondition for better bond and stock valuation.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

Corporate payout management

Fiona Sydney

2022-05-05 09:34:00 Thursday ET

Corporate payout management

Corporate payout management This corporate payout literature review rests on the recent survey article by Farre-Mensa, Michaely, and Schmalz (2014). Out

+See More

Volcker, Greenspan, Bernanke, and Yellen contribute to a Wall Street Journal op-ed on monetary policy independence.

Olivia London

2019-09-23 12:25:00 Monday ET

Volcker, Greenspan, Bernanke, and Yellen contribute to a Wall Street Journal op-ed on monetary policy independence.

Volcker, Greenspan, Bernanke, and Yellen contribute to a Wall Street Journal op-ed on monetary policy independence. These former Federal Reserve chiefs unit

+See More

Most sustainably successful business leaders make a mark in the world, create a positive impact, and challenge the status quo.

Peter Prince

2020-08-12 07:25:00 Wednesday ET

Most sustainably successful business leaders make a mark in the world, create a positive impact, and challenge the status quo.

Most sustainably successful business leaders make a mark in the world, create a positive impact, and challenge the status quo. Jerry Porras, Stewart Emer

+See More

Warren Buffett shares his fresh economic insights and value investment strategies at the Berkshire Hathaway shareholder forum.

Daphne Basel

2018-05-05 07:33:00 Saturday ET

Warren Buffett shares his fresh economic insights and value investment strategies at the Berkshire Hathaway shareholder forum.

Warren Buffett shares his fresh economic insights and value investment strategies at the Berkshire Hathaway shareholder forum in May 2018 despite the new GA

+See More

President Trump imposes punitive tariffs on $60 billion Chinese imports in a brand-new trade war.

Laura Hermes

2018-03-25 08:39:00 Sunday ET

President Trump imposes punitive tariffs on $60 billion Chinese imports in a brand-new trade war.

President Trump imposes punitive tariffs on $60 billion Chinese imports in a brand-new trade war as China hits back with retaliatory tariffs on $3 billion U

+See More

Zillow share price plunges 20% year-to-date as Redfin and Trulia also experience an economic slowdown in the real estate market.

Daisy Harvey

2018-11-17 09:33:00 Saturday ET

Zillow share price plunges 20% year-to-date as Redfin and Trulia also experience an economic slowdown in the real estate market.

Zillow share price plunges 20% year-to-date as its competitors Redfin and Trulia also experience an economic slowdown in the real estate market. The real es

+See More