Business and credit cycles, financial instability and recession triggers

Summary

The paper presents a quasi-historiographical or “narrative” analysis of the most critical developments occurring prior to and through the last nine recessions in light of Minsky’s theory of financial instability.

Key points

• Key points:
• We identify a pattern of events that can be used as a checklist that provides qualitative information for assessing probabilities of near-time recessions
• In the broadest sense, the sequence of events that we identify starts with an increase in leverage in one or more segments of the economy followed by an increase in interest rates and financial conditions tightening, credit quality deterioration, a varying degree of credit rationing or a credit crunch, monetary policy relaxation, and ends with deleveraging
• The pattern is present and documented for all U.S. cycles in the period 1954-2010
• Applying the checklist to the current economic conditions in the U.S. as of the end of 2019 suggests that the catalyst for the next recession will be business debt and while the credit/business cycle continues to age, the likelihood of a recession over the next twelve months remains moderate due to relatively favorable financial conditions

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