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
President Trump applies an increasingly bellicose stance toward the Iranian leader Hassan Rouhani.
Jacob Miramar

2018-08-09 16:36:00 Thursday ET

President Trump applies an increasingly bellicose stance toward the Iranian leader Hassan Rouhani.

President Trump applies an increasingly bellicose stance toward the Iranian leader Hassan Rouhani as he rejects a global agreement to curb Iran's nuclea

+See More
Apple unveils 3 iPhone 11 models with new original video services and stars such as Oprah Winfrey, Jennifer Aniston, and Reese Witherspoon.
Joseph Corr

2019-10-13 16:22:00 Sunday ET

Apple unveils 3 iPhone 11 models with new original video services and stars such as Oprah Winfrey, Jennifer Aniston, and Reese Witherspoon.

Apple unveils 3 iPhone 11 models with new original video services and stars such as Oprah Winfrey, Jennifer Aniston, and Reese Witherspoon. Apple releases t

+See More
Corporate investment insights from mergers and acquisitions
Joseph Corr

2022-10-25 11:31:00 Tuesday ET

Corporate investment insights from mergers and acquisitions

Corporate investment insights from mergers and acquisitions Relative market misvaluation between the bidder and target firms drives most waves of mergers

+See More
Blue-ocean strategists shift focus from current competitors to alternative non-customers with new market space.
Apple Boston

2020-05-21 11:30:00 Thursday ET

Blue-ocean strategists shift focus from current competitors to alternative non-customers with new market space.

Most blue-ocean strategists shift fundamental focus from current competitors to alternative non-customers with new market space. W. Chan Kim and Renee Ma

+See More
St Louis Federal Reserve President James Bullard indicates that his ideal baseline scenario remains a mutually beneficial China-U.S. trade deal.
Charlene Vos

2019-06-09 11:29:00 Sunday ET

St Louis Federal Reserve President James Bullard indicates that his ideal baseline scenario remains a mutually beneficial China-U.S. trade deal.

St Louis Federal Reserve President James Bullard indicates that his ideal baseline scenario remains a mutually beneficial China-U.S. trade deal. Bullard ind

+See More
Brent crude oil prices spike to $70-$75 per barrel after the Trump administration stops waiving economic sanctions on Iran.
Jacob Miramar

2019-05-13 12:38:00 Monday ET

Brent crude oil prices spike to $70-$75 per barrel after the Trump administration stops waiving economic sanctions on Iran.

Brent crude oil prices spike to $70-$75 per barrel after the Trump administration stops waiving economic sanctions on Iranian oil exports. U.S. State Secret

+See More