Financial and Monetary Systems

Could this help us better understand the influence of finance and credit on economies?

People pass the Bank of England in the City of London January 16, 2014. Bank of England representatives discussed the process of setting foreign exchange benchmarks with senior currency dealers at major investment banks in April 2012, more than a year before regulators launched official probes into alleged rate manipulation, according to a Freedom of Information Request made by Reuters.

Nick Bunker looks at key findings from a paper that was part of the annual National Bureau of Economics Research conference. Image: REUTERS/Luke MacGregor

Nick Bunker
Policy Analyst, Washington Center for Equitable Growth
Our Impact
What's the World Economic Forum doing to accelerate action on Financial and Monetary Systems?
The Big Picture
Explore and monitor how Financial and Monetary Systems is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Financial and Monetary Systems

Fifty-five years ago, Nicholas Kaldor, a macroeconomist at the University of Cambridge, laid out six “stylized facts” about economies. Kaldor wasn’t just summarizing what economists had learned about macroeconomics at that point, but he was also outlining what macroeconomists should push forward with their research, as Charles Jones and Paul Romer note in their piece on “the new Kaldor facts.”

In the wake of the Great Recession, economists have started to grapple with the fact that their macroeconomic models didn’t fully appreciate the importance of the financial sector in the swings of the economy. Although they’ve already started this endeavor, a set of stylized facts about the influence of finance and credit might also be helpful. Luckily, a new paper provides such a list.

Written by economists Òscar Jordà of the Federal Reserve Bank of San Francisco, Moritz Schularick of the University of Bonn, and Alan M. Taylor of the University of California, Davis, the paper was part of the annual National Bureau of Economics Research conference on macroeconomics held last week in Cambridge. The paper is part of the economists’ research agenda looking at the long history of banking and credit and their effects on the macroeconomy.

After the ratio of credit to gross domestic product among high-income countries essentially stayed stable for a century, it has increased dramatically since the late 1970s. In 1980, the average bank-lending-to-GDP ratio for high-income countries was 62 percent. Thirty years later in 2010, it was 118 percent. It’s for good reason that economists call this jump the “financial hockey stick.” The increase is due primarily to more mortgage lending as households in advanced economies have become more and more leveraged.

So what does this increasing leverage and financialization mean for these economies overall? Very quickly, here are the paper’s topline results:

-Higher credit is associated with less volatility in overall economic growth, consumption, and investment.

-More credit is associated with lower average economic growth.

-More credit is also associated with higher chances of more “spectacular crashes.”

-All of these correlations are stronger in the period of high leverage since the 1980s.

Note that these are just correlations, so the paper isn’t saying that credit necessarily causes these outcomes. Rather, models of the macroeconomy should be able to account for the strong relationships between key measures (output, consumption, investment) and the amount of credit in the economy. In our financialized economy, it’s something we should figure out sooner rather than later.

Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:
Financial and Monetary SystemsInequalityEconomic Progress
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

The latest from the IMF on the global economy, and other economics stories to read

Joe Myers

April 12, 2024

About Us



Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum