Abstract

ABSTRACT:

Economists both failed to predict the global financial crisis and underestimated its consequences for the broader economy. Focusing on the second of these failures, this paper makes two contributions. First, I review research since the crisis on the role of credit factors in the decisions of households, firms, and financial intermediaries and in macroeconomic modeling. This research provides broad support for the view that credit market developments deserve greater attention from macroeconomists, not only for analyzing the economic effects of financial crises but in the study of ordinary business cycles as well. Second, I provide new evidence on the channels by which the recent nancial crisis depressed economic activity in the United States. Although the deterioration of household balance sheets and the associated deleveraging likely exacerbated the initial economic downturn and the slowness of the recovery, I find that the unusual severity of the Great Recession was due primarily to the panic in funding and securitization markets, which disrupted the supply of credit. This finding helps to justify the government's extraordinary efforts to stem the panic in order to avoid greater damage to the real economy.

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Additional Information

ISSN
1533-4465
Print ISSN
0007-2303
Pages
pp. 251-342
Launched on MUSE
2019-09-05
Open Access
No
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