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This paper reviews literature on the empirical relationship between vulnerabilities in the financial system and the macroeconomy, and how monetary policy affects that connection. Financial vulnerabilities build up over time, with both risk appetite and risk taking rising during economic expansions. To some extent, financial crises are predictable and have severe real economic consequences when they occur. Empirically it is difficult to link monetary policy to financial vulnerabilities, in part because financial cycles have long durations, making it difficult to separate effects of changes in monetary policy from other business cycle effects.

Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial crisis risk. Based on the near-universe of advanced economy financial cycles since the nineteenth century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them. (JEL E43, E44, E52, E58, F33)

What is the relationship between bank capital, the risk of a financial crisis, and its severity? This article introduces the first comprehensive analysis of the long-run evolution of the capital structure of modern banking using newly constructed data for banks’ balance sheets in 17 countries since 1870. In addition to establishing stylized facts on the changing funding mix of banks, we study the nexus between capital structure and financial instability. We find no association between higher capital and lower risk of banking crisis. However, economies with better capitalized banking systems recover faster from financial crises as credit begins to flow back more readily.

In this paper, we show that policymakers can distinguish between good and bad credit booms with high accuracy and they can do so in real time. Evidence from 17 countries over nearly 150 years of modern financial history shows that credit booms that are accompanied by house price booms and a rising loan‐to‐deposit ratio are much more likely to end in a systemic banking crisis than other credit booms. We evaluate the predictive accuracy for different classification models and show that characteristics observed in real time contain valuable information for sorting the data into good and bad booms.

The trilemma of international finance explains why interest rates in countries that fix their exchange rates and allow unfettered cross-border capital flows are outside the monetary authority’s control. Based on this exogenous source of variation, we show that monetary interventions have large and significant effects using historical panel data since 1870. The causal effect of these interventions depends on whether: (1) the economy is above or below potential; (2) inflation is low; and (3) there is a credit boom in mortgage markets. Several novel control function adjustments account for potential spillover effects. The results have important implications for monetary policy.

Business cycles are costlier and stabilization policies more beneficial than widely thought. This paper shows that all business cycles are asymmetric and resemble mini “disasters”. By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for all advanced economies since 1870. Focusing on the peacetime sample, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Using random coefficient local projections we get an easy and transparent mapping from the estimates to the calibrated simulation model. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. In postwar America, households would sacrifice more than 10 percent of consumption to avoid such cyclical fluctuations.

How much credit does Donald Trump deserve for the macroeconomic performance of the US economy? Growth and job creation have been robust during the first 2.5 years of his presidential term, but this does not prove that Trump made a difference. In this note we develop a counterfactual scenario for how the US economy would have evolved without Trump—we let a matching algorithm determine which combination of other economies best resembles the pre-election path of the US economy. We then compare the post-election performance of the US economy to this synthetic “doppelganger”. There is little evidence for a Trump effect.

This paper provides a household-level perspective on the rise of global saving and wealth since the 1980s. We calculate asset-specific saving flows and capital gains across the wealth distribution for the G3 economies - the U.S., Europe, and China. In the past four decades, global saving inequality has risen sharply. The share of household saving flows coming from the richest 10% of household increased by 60% while saving of middle class households has fallen sharply. The most important source for the surge in top-10% saving was the secular rise of global corporate saving whose ultimate owners the rich households are. Housing capital gains have supported wealth growth for middle-class households despite falling saving and rising debt. Without meaningful capital gains in risky assets, the wealth share of the bottom half of the population declined substantially in most G3 economies.

Deutschland steht vor einer neuen Wohnungsfrage. Der anhaltende Boom am Immobilienmarkt spaltet die Gesellschaft in Gewinner*innen und Verlierer*innen. Auf der einen Seite haben die Preissteigerungen seit 2011 deutsche Immobilienbesitzer um etwa drei Billionen Euro reicher gemacht. Mehr als die Hälfte der Kapitalgewinne entfiel auf die reichsten zehn Prozent der Deutschen, aber auch Haushalte der oberen Mittelschicht (80. Perzentil) haben stark profitiert. Städtische Mieterhaushalte mit geringem Einkommen sind die großen Verlierer des Booms. In den Städten sind die Mieten im letzten Jahrzehnt dort am stärksten gewachsen, wo einkommensschwache Haushalte leben (»Gentrifizierung«). Obwohl steigende Mieten zeigen, dass das zu geringe Angebot von Wohnraum und nicht das niedrige Zinsumfeld den Boom am Immobilienmarkt treibt, versäumt es Deutschland weiterhin, die niedrigen Zinsen für zusätzliche Investitionen zu nutzen. Unsere Prognose des Wohnungsbedarfs bis 2030 lässt erwarten, dass das soziale Konfliktpotenzial der neuen Wohnungsfrage weiter zunehmen wird: Im Jahr 2030 werden knapp eine Million Wohnungen fehlen, davon allein 340.000 in den sieben größten Städten. Germany is faced with a new housing question. The current house price boom divides German society into winners and losers. Price increases since 2011 have increased owners’ housing wealth by around 3 trillion Euro. Over half of all housing capital gains goes to the richest 10 percent of Germans, although the upper quintile also benefited considerably. Urban low-income tenant households, by contrast, are the losers of the boom, as urban rents increased most in their neighborhoods (»gentrification«). Although rising rents show that housing shortages and not low interest rates are the driver of the boom, Germany still does not invest sufficiently. Our forecast of housing needs until 2030 suggests that social conflicts around the housing question are not to subside: in 2030 there will be a housing shortage of about 1 million units, 340.000 lacking units in the seven biggest cities alone.

Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such measures on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers' objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.

What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive data set for all major asset classes, including housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new findings and puzzles.

This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Specifically, we show that, although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value. Over multi-year time horizons, the employment effects are substantially smaller than the countervailing portfolio effects. We conclude that there is little reason to think that accommodative monetary policy plays a significant role in reducing racial inequities in the way often discussed. On the contrary, it may well accentuate inequalities for extended periods.

The pre-crisis paradigm focused exclusively on the positive role of finance. The new paradigm takes the other side of finance seriously and arrives at distinctly different trade-offs and regulatory approaches.

Using new long-run microdata, this article studies wealth and income trends of households with a college degree (college households) and without a college degree (noncollege households) in the United States since 1956. We document the emergence of a substantial college wealth premium since the 1980s, which is considerably larger than the college income premium. Over the past four decades, the wealth of college households has tripled. By contrast, the wealth of noncollege households has barely grown in real terms over the same period. Part of the rising wealth gap can be traced back to systematic portfolio differences between college and noncollege households that give rise to different exposures to asset price changes. Noncollege households have lower exposure to the equity market and have profited much less from the recent surge in the stock market. We also discuss the importance of financial literacy and business ownership for the increase in wealth inequality between college and noncollege households.

Business cycles are costlier and stabilization policies could be more beneficial than widely thought. This paper introduces a new test to show that all business cycles are asymmetric and resemble “mini-disasters.” By this we mean that growth is pervasively fat-tailed and non-Gaussian. Using long-run historical data, we show empirically that this is true for advanced economies since 1870. Focusing on peacetime eras, we develop a tractable local projection framework to estimate consumption growth paths for normal and financial-crisis recessions. Introducing random coefficient local projections (RCLP) we get an easy and transparent mapping from the estimates to a calibrated simulation model with disasters of variable severity. Simulations show that substantial welfare costs arise not just from the large rare disasters, but also from the smaller but more frequent mini-disasters in every cycle. On average, and in post-WW2 data, even with low risk aversion, households would sacrifice about 15 percent of consumption to avoid such cyclical fluctuations. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level dataset that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. household debt between the 1970s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Economic nationalism is on the rise, but at what cost? We study this question using the unexpected outcome of the Brexit referendum vote as a natural macroeconomic experiment. Employing synthetic control methods, we first show that the Brexit vote has caused a UK output loss of 1.7% to 2.5% by year-end 2018. An expectations-augmented VAR suggests that these costs are, to a large extent, driven by a downward revision of growth expectations in response to the vote. Linking quasi-experimental identification to structural time-series estimation allows us not only to quantify the aggregate costs but also to understand the channels through which expected economic disintegration impacts the macroeconomy.

The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent), standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities. The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper introduces a new long-run data set based on archival data from historical waves of the Survey of Consumer Finances. Studying the joint distribution of household income and wealth, we exp...

This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. While comovement of credit and house prices increased in line with growing real sector integration, comovement of equity prices has increased above and beyond growing real sector integration. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that US monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes.

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the twentieth century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms, which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.

Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices' bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

Economic nationalism is on the rise. What are the costs of cutting back international economic integration and rising policy uncertainty? We use the unexpected outcome of the Brexit vote in June 2016 as a natural macroeconomic experiment to study the costs of economic disintegration and their causes. As a methodological innovation, we propose a novel combination of synthetic control methods to identify the output loss caused by the Brexit vote, conjoined with an expectations-augmented vector autoregression to understand its drivers. Using the synthetic control, we first show that forward looking households and businesses have lowered spending in response to the Brexit vote, causing an output loss of close to 2 percent. Decomposition of the VAR estimates shows that shocks to economic policy uncertainty and growth expectations in the quarter following the Brexit vote explain almost the entire output loss. While higher uncertainty accounts for much of the initial output drop, the economic costs increase over time because of a downward revision of output growth expectations. Overall, both uncertainty and growth expectations account for about one half of the total economic costs of the Brexit vote. Linking quasi-experimental identification to structural time series variance decomposition, our study exposes not only the aggregate costs of the UK’s expected economic disintegration from Europe but also specifies the channels through which the Brexit vote affected the macroeconomy.

This paper introduces a new long-run dataset based on archival data from historical waves of the Survey of Consumer Finances. The household-level data allow us to study the joint distributions of household income and wealth since 1949. We expose the central importance of portfolio composition and asset prices for wealth dynamics in postwar America. Asset prices shift the wealth distribution because the composition and leverage of household portfolios differ systematically along the wealth distribution. Middle-class portfolios are dominated by housing, while rich households predominantly own equity. An important consequence is that the top and the middle of the distribution are affected differentially by changes in equity and house prices. Housing booms lead to substantial wealth gains for leveraged middle-class households and tend to decrease wealth inequality, all else equal. Stock market booms primarily boost the wealth of households at the top of the distribution. This race between the equity market and the housing market shaped wealth dynamics in postwar America and decoupled the income and wealth distribution over extended periods. The historical data also reveal that no progress has been made in reducing income and wealth inequalities between black and white households over the past 70 years, and that close to half of all American households have less wealth today in real terms than the median household had in 1970.

Central banks increasingly rely on macroprudential measures to manage the financial cycle. However, the effects of such policies on the core objectives of monetary policy to stabilise output and inflation are largely unknown. In this paper we quantify the effects of changes in maximum loan-to-value (LTV) ratios on output and inflation. We rely on a narrative identification approach based on detailed reading of policy-makers’ objectives when implementing the measures. We find that over a four year horizon, a 10 percentage point decrease in the maximum LTV ratio leads to a 1.1% reduction in output. As a rule of thumb, the impact of a 10 percentage point LTV tightening can be viewed as roughly comparable to that of a 25 basis point increase in the policy rate. However, the effects are imprecisely estimated and the effect is only present in emerging market economies. We also find that tightening LTV limits has larger economic effects than loosening them. At the same time, we show that changes in maximum LTV ratios have substantial effects on credit and house price growth. Using inverse propensity weights to rerandomise LTV actions, we show that these effects are likely causal.

What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive data set for all major asset classes, including housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new findings and puzzles.

What is the relationship between bank capital, the risk of a financial crisis, and its severity? This article introduces the first comprehensive analysis of the long-run evolution of the capital structure of modern banking using newly constructed data for banks’ balance sheets in 17 countries since 1870. In addition to establishing stylized facts on the changing funding mix of banks, we study the nexus between capital structure and financial instability. We find no association between higher capital and lower risk of banking crisis. However, economies with better capitalized banking systems recover faster from financial crises as credit begins to flow back more readily.

Economists routinely emphasize the risks of excessive public borrowing, but tend to have a more benign view of private sector debt. In this study, I draw on recent comparative studies of the macroeconomic history of advanced economies since 1870. I synthesize four historical facts and argue that a more balanced view of public and private borrowing is warranted. First, while both public and private debts have increased markedly, private, not public debts have climbed to historically unprecedented levels. Second, outside war times, financial crises have typically originated in the private sector, yet the costs have increasingly been socialized. Third, the historical record shows that modern democracies have been relatively successful in managing their financial affairs, evidenced by a systematically positive response of primary balances to high debt ratios. Fourth, I demonstrate that private and public debt cycles have been tightly linked since the 1970s.

This article tracks the history of sectoral saving and borrowing in the US economy over the past 50 years. We show that the financial imbalances that erupted in the financial crisis of 2008 were long in the making and preceded the emergence of global imbalances in the 2000s. These new dynamics in the household sector were already apparent in the 1990s, long before the deterioration in the US government balance or the current account balance and long before the arrival on the international stage of Chinese reserve accumulation. The record low household savings rate in the past decade was the product of two separate trends: a sharp fall in the asset acquisition of American households in the 1990s, and an explosion of mortgage borrowing in the 2000s. The American credit boom of the 2000s had few direct links to reserve accumulation in emerging markets. The mortgage boom was financed by the US financial sector, which intermediated foreign funds from ‘private’ sources. (JEL codes: E21, E22, F32, N10, N12)

In advanced economies, a century-long, near-stable ratio of credit to GDP gave way to rapid financialization and surging leverage in the last forty years. This “financial hockey stick” coincides with shifts in foundational macroeconomic relationships beyond the widely noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments, which we can document thanks to a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility, but also lower growth, more tail risk, as well as tighter real-real and real-financial correlations. International real and financial cycles also cohere more strongly. The new stylized facts that we discover should prove fertile ground for the development of a new generation of macroeconomic models with a prominent role for financial factors.