Jan Hannes Lang, Peter Welz, 11 March 2019

Financial crises are often preceded by credit excesses, but how do we know when credit is excessive? This column shows that deviations of household credit from levels that are justified by economic fundamentals exhibit long cycles of 15 to 25 years with large amplitudes of around 20%. Household credit excesses build up many years ahead of financial crises and only gradually unwind thereafter. Most importantly, higher levels of household credit imbalances are associated with larger declines in real GDP once a financial crisis hits. The findings suggest that household credit cycles should be carefully monitored by macroprudential policymakers to ensure financial stability.

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