Luc Laeven, Peter McAdam, Alexander Popov, 10 December 2018

There are good arguments both in favour and against the idea that more labour market flexibility will deliver benefits to an economy during a downturn. This column presents novel evidence on this question, using data from Spain during the 2008–09 credit crunch. The results show that credit-constrained firms grow faster if they are subject to less strict firing and hiring restrictions, as long as they are technologically able to substitute labour for capital. The findings provide an argument in favour of more flexible labour laws.

Patrice Baubeau, Eric Monnet, Angelo Riva, Stefano Ungaro, 29 November 2018

Previous research has downplayed the role of banking panics and financial factors in the French Great Depression. This column uses a newly assembled dataset of balance sheets for more than 400 French banks from the interwar period to challenge this long-held idea. The empirical results show two dramatic waves of panic in 1930 and 1931, and point to a flight-to-safety mechanism. The findings illustrate how minor macroeconomic assumptions and extrapolations on monetary statistics can introduce large, persistent biases in historiography.

Fabrizio Coricelli, Marco Frigerio, 23 February 2017

A main source of alternative financing during credit crunches is trade credit. This column argues that small and medium-sized enterprises in Europe suffered a liquidity squeeze during the Great Recession due to the increase of their net lending to large firms. This squeeze was induced by their weak bargaining power in trade credit relationships, and had significant adverse effects on their levels of investment and employment.

Fabio Berton, Sauro Mocetti, Andrea Presbitero, Matteo Richiardi, 09 February 2017

Understanding the real effects of financial shocks is essential for the design of effective growth-restoring policies. This column uses data on job contracts matched with the universe of firms and their banks from a region of Italy to analyse the employment effects of financial shocks. Financially constrained firms – especially the least productive ones – significantly reduced employment, mostly of less-educated and lower-skilled workers with temporary contracts. While these results suggest possible distributional effects across workers, they could also reflect a productivity-enhancing reallocation function of financial shocks.

Avinash Persaud, 20 November 2015

As the recent Financial Stability Board decision on loss-absorbing capital shows, repairing the financial system is still a work in progress. This column reviews the author’s new book on the matter, Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risks. It argues that financial institutions should be required to put up capital against the mismatch between each type of risk they hold and their natural capacity to hold that type of risk. 

Olivier Blanchard, 03 October 2014

Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.

Erik Feyen, Raquel Letelier, Inessa Love, Samuel Maimbo, Roberto Rocha, 15 March 2014

Eastern Europe was hit especially hard by the credit crunch during the global financial crisis. This column presents new evidence suggesting that reliance on foreign funding was more important than foreign bank ownership per se in exacerbating the post-crisis credit contraction. These findings point to the need to put more emphasis on the discussion of bank business models, regulatory standards, and supervisory arrangements.

Samuel Bentolila, Marcel Jansen, 01 February 2014

The evidence about the effect of declined lending during the Great Recession on the employment is quite limited. This column presents new research on the problem focusing on the case of Spain. A large part of credit to non-financial firms before the crisis came from weak banks, which solvency was strongly eroded during the crisis. As a result, firms that relied heavily on loans from such weak banks displayed significantly higher employment reduction in comparison to similar, less exposed firms. The bulk of employment destruction was driven by firm closures, which carries higher economic costs than downsizing, and could potentially make the recession more protracted.

Ata Bertay, Asli Demirgüç-Kunt, Harry Huizinga, 02 August 2012

Bank bonuses may not have changed much in the last few years, but their owners have. This column asks whether government-owned banks may bring stability to the supply of credit over the business cycle and especially at a time of financial crisis.

Sarah Holton, Martina Lawless, Fergal McCann, 04 March 2012

As the Eurozone crisis continues, lending to the real economy has fallen significantly. But it is difficult to know if this is due to a drop in demand for loans or a drying up of supply. Using data for small- and medium-sized companies in 11 Eurozone countries, this column identifies the effects of the crisis on credit demand, supply, and conditions.

Andrea Presbitero, Gregory Udell, Alberto Zazzaro, 12 February 2012

Understanding credit crunches is a major concern for policymakers. This column suggests that the severity of a credit crunch in a specific area depends on the hierarchical structure of the banks operating in that credit market. It explores the Italian case and shows that, in the months following the collapse of Lehman Brothers, banks retracted disproportionally from markets that are more distant from their headquarters.

Marco Onado, Andrea Resti, 07 December 2011

The newborn European Banking Authority has been fiercely criticised in the few months of its life. This column argues that most of the criticisms have been driven by lobbying interests more than by noble worries on the future of the European economy. It adds that the current market turmoil requires a pan-European guarantee scheme for banks, a ‘big bazooka’ for sovereign debt which does not boil down to a pop gun, and stronger bank supervision at the EBA level.

Adrian Bell, Chris Brooks, Tony Moore, 13 May 2009

It is widely believed that the current credit squeeze, leading to bank failures, is a modern phenomenon arising from the interplay of a historically unique set of circumstances that could not have been foreseen. But a team of academics – a finance professor and two medieval historians – at the University of Reading’s ICMA Centre has documented a medieval credit crunch that bears remarkable parallels with the current crisis.

Daniel Gros, 21 December 2008

Most countries need a fiscal stimulus, but how should it be implemented? This column assesses fiscal policy's potential to increase demand and argues that any meaningful boost must come from transfers to the private sector, not infrastructure investments. Tax cuts will be most effective in countries where households are net borrowers.

Arvind Subramanian, 10 November 2008

The Indian variant of the credit crunch is different. This column outlines potential means of expanding India’s credit supply. Simply cutting interest rates will not suffice.

Frank Heinemann, 26 October 2008

The dizzying falls in equity prices seem to have stopped. If they restart, it may be time for radical measures. This column suggests one motivated by bubble theory. The Fed could temporarily guarantee a lower bound for the S&P 500 through targeted purchases of market portfolios via open-market operations and financed by injecting cash.

The Editors, 18 August 2008

Edited by Andrew Felton and Carmen Reinhart, this freely downloadable book brings together columns that provide invaluable insights into the crisis from the world’s leading experts.

Guillermo de la Dehesa, 16 July 2008

The current credit crisis should be both a squeeze and a crunch, but it seems to have been neither in the euro area. This column explains why credit may become costlier or scarcer under current conditions and explores how European financial entities seem to be defying the negative news.

Rafael Repullo, Javier Suarez, 14 July 2008

Basel II’s goal was to reduce incentives for excessive risk taking. Making banks’ capital requirements risk-sensitive, however, also set the system up for credit crunches during economic down turns. This column argues that small cyclical adjustments to the confidence levels set by regulator could preserve Basel II’s value-at-risk foundation while avoiding painful credit crunches during periods of economic distress.

Nicholas Bloom, 04 June 2008

The credit crunch has produced significant volatility in the stock market. This column argues that the wave of uncertainty troubling the markets will likely induce a recession – and render policy instruments powerless to prevent it.

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