Economic crises have prolonged consequences on consumer behaviour, beyond effects captured by standard economic variables. Standard life-cycle consumption channels often fail to explain these lasting effects. This column argues that economic downturns ‘scar’ consumers in the long run. Consumers who have lived through times of high unemployment remain pessimistic about the future financial situation, spend less in future years, and accumulate more savings, controlling for income, wealth, and employment. These results suggest a novel micro-foundation of fluctuations in aggregate demand and imply long-run effects of macroeconomic shocks. 

Credit booms are not rare and usually precede financial crises. However, some end in a crisis while others do not. This column argues that credit booms start with an increase in productivity, which subsequently falls much faster during ‘bad booms’. When this decline is severe enough, it changes the informational regime in credit markets, leading to a drying up of credit. A crisis may be the result of an exhausted credit boom and not necessarily of a negative productivity shock.