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  • 2020
  • Working Paper
  • HBS Working Paper Series

Predictable Financial Crises

By: Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen
  • Format:Print
  • | Language:English
  • | Pages:64
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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

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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About The Authors

Robin Greenwood

Finance
→More Publications

Samuel G. Hanson

Finance
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Andrei Shleifer

Negotiation, Organizations & Markets
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More from the Authors

    • 2020
    • Faculty Research

    Rate-Amplifying Investor Demand and the Excess Sensitivity of Long-Term Interest Rates

    By: Samuel G. Hanson, David O. Lucca and Jonathan H. Wright
    • Fall 2020
    • Brookings Papers on Economic Activity

    Sizing Up Corporate Restructuring in the COVID Crisis

    By: Robin Greenwood, Benjamin Iverson and David Thesmar
    • Fall 2020
    • Brookings Papers on Economic Activity

    Business Credit Programs in the Pandemic Era

    By: Samuel Gregory Hanson, Adi Sunderam, Jeremy C. Stein and Eric Zwick
More from the Authors
  • Rate-Amplifying Investor Demand and the Excess Sensitivity of Long-Term Interest Rates By: Samuel G. Hanson, David O. Lucca and Jonathan H. Wright
  • Sizing Up Corporate Restructuring in the COVID Crisis By: Robin Greenwood, Benjamin Iverson and David Thesmar
  • Business Credit Programs in the Pandemic Era By: Samuel Gregory Hanson, Adi Sunderam, Jeremy C. Stein and Eric Zwick
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