DP7085 What Happens During Recessions, Crunches and Busts?

Author(s): Stijn Claessens , Ayhan Kose , Marco E Terrones

Publication Date: December 2008

Keyword(s): business cycles , recessions , credit crunches , house prices , equity prices , busts

JEL(s): E32 , E44 , E51 , F42

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP7085.asp.asp

We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions.