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    Predictable Financial Crises
    07 Jul 2020Working Paper Summaries

    Predictable Financial Crises

    by Robin Greenwood, Samuel G. Hanson, Andrei Shleifer, and Jakob Ahm Sørensen
    One central issue in the study of macroeconomic stability is financial crisis predictability. This paper estimates the probability of financial crises as a function of past credit and asset price growth.
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    Author Abstract

    Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: June 2020
    • HBS Working Paper Number: HBS Working Paper #20-130
    • Faculty Unit(s): Finance; Negotiation, Organizations & Markets
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    Robin Greenwood
    Robin Greenwood
    George Gund Professor of Finance and Banking
    Anne and James F. Rothenberg Faculty Fellow
    Senior Associate Dean for Faculty Development and Research
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    Samuel G. Hanson
    Samuel G. Hanson
    William L. White Professor of Business Administration
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    Andrei Shleifer
    Andrei Shleifer
    Visiting Professor of Business Administration
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