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The Great Mortgaging

Work by Oscar Jorda and Alan Taylor featured in the Financial Times.

Oscar Jorda (UC Davis), Mortiz Schularick (U. of Bonn) and Alan Taylor (UC Davis) build on previous work on the interplay between credit and financial crises.

The trio previously collaborated on a comprehensive study of every rich-world business cycle since 1870, which found that the rate of private credit growth during an economic expansion helped predict the likelihood of financial crisis and directly corresponded to the severity of the subsequent downturn even in cases when there was no financial crisis.

The new paper covers a slightly longer period and somewhat larger set of countries, but the biggest improvement is its distinction of different types of credit and different categories of borrowers. Their basic finding is that it was mortgage lending rather than lending to businesses or consumer credit that can explain the enormous increase in total bank credit (a decent proxy for overall financialisation) over the past 35 years.

You can read a more in Financial Times here.