Crises of confidence turn booms into busts. Bloated household balance sheets and high debt offer the right ingredients for a confidence-driven housing bust. This column develops an analytic framework that accommodates the potential role of confidence fluctuations as a source of uncertainty in the economy. Current debt levels are shown to determine the exposure to crises of confidence. The results point to a clear role for macroprudential policy in the prevention of such crises.
Marco Terrones, Stijn Claessens, M. Ayhan Kose, 17 July 2011
The recent crisis has not only been a painful reminder of the importance of financial cycles, but it has also exposed our limited knowledge of them. This column explores two key questions on financial cycles: What are their main features and what happens when cycles in different financial markets coincide?
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