Déjà vu All Over Again? Learning from Nonfinancial Business Credit Booms and Busts of the Past
I study nonfinancial business credit booms that took place in the United States, the Nordic Countries, and Korea in the past century. I examine the factors that created the boom, what caused the boom to turn to a bust, and the effect of leverage on the events that followed. The case studies illustrate the variety of economic and institutional factors that contribute to nonfinancial business credit booms as well as the intensity of the fallout when booms turned to busts. Though the factors that led to the booms varied, one commonality is that the turning point between boom and bust period in every case coincided with adoption of central bank policies aimed at raising interest rates. This illustrates the difficulty that central banks have in executing policy when the business sector is highly levered. It also suggests that research aimed at identifying “bad” credit booms or predicting the impact of credit growth on future economic outcomes should consider both institutional factors as well as quantitative measures of credit growth and risk.