Predictable Financial Crises

Robin  Greenwood; Samuel G. Hanson; Andrei   Shleifer; Jakob Ahm Sørensen

Working Paper | HBS Working Paper Series | 2020

Predictable Financial Crises

by Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen

Abstract

Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.

Keywords: Financial Crisis; Forecasting and Prediction; Mathematical Methods;

Language: English

Format: Print

64 pages

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Citation:

Greenwood, Robin, Samuel G. Hanson, Andrei Shleifer, and Jakob Ahm Sørensen. "Predictable Financial Crises." Harvard Business School Working Paper, No. 20-130, June 2020.

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Predictable Financial Crises

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