Must-read: Oscar Jorda, Moritz Schularick, and Alan M. Taylor: “Macrofinancial History and the New Business Cycle Facts”

Must-Read: Oscar Jorda, Moritz Schularick, and Alan M. Taylor: Macrofinancial History and the New Business Cycle Facts: “In the era of modern finance…

…a century-long near-stable ratio of credit to GDP gave way to increasing financialization and surging leverage in advanced economies 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. We document an extensive set of such moments based on a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility but lower growth, more tail risk, and tighter real-real and real- financial correlations. International real and financial cycles also cohere more strongly. The new stylized facts we document should prove fertile ground for the development of a newer generation of macroeconomic models with a prominent role for financial factors.