Growth-and-risk trade-off

Arbeitspapier

We study the effects of credit over the business cycle, distinguishing between expansions and contractions. We find that there is a growth and risk trade-off in the pace of credit growth over the business cycle. While rapid credit growth tends to be followed by deeper recessions, we also find that credit growth has a positive impact on the duration of expansions. This poses a trade-off for the policymaker: Limiting the buildup of financial risk to avoid a deep recession can negatively affect the cumulation of economic growth during the expansion. We show that intermediate levels of credit growth maximize long-term growth while limiting volatility. Macroprudential policies should be used to manage this growth and risk trade-off, striking a balance between allowing expansions to last longer and avoiding deep recessions.

Object Details

• ISBN: 978-92-899-4040-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2397

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Business Fluctuations; Cycles ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: cycles ; macroprudential policies ; credit growth ; nancial crisis ; GDP-at-risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gadea, María Dolores ; Laeven, Luc ; Pérez-Quirós, Gabriel
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2020

Further information

• DOI: doi:10.2866/978428
• Handle: http://hdl.handle.net/10419/229011
• Last update: 10.03.2025, 11:43 AM CET