In 2007-08, Europe and US were overwhelmed by a financial crisis, followed by a severe, persistent economic recession. Prior to the crisis, there was a debt and asset-price boom. Historical studies show that this is the common pattern:
(i) Financial crises are followed by a strong contraction of aggregate output and employment (and credit) and take a longer time to recover (than non-financial recessions);
(ii) The best predictor of financial crises is an ex-ante strong credit boom (accompanied by high asset prices).
There is growing finance-macro theory and new policy, but no micro evidence. In this project we study: Why are the effects of debt and financial shocks strong and persistent? What are the channels of transmission (households, banks, firms, sovereigns)? As crises are not exogenous, what are the determinants? Can public policy (macroprudential, monetary) alleviate the negative effects? Are there costs or limitations of these policies?
To study these issues, we are constructing several micro datasets that are absolutely new in the literature.
The overall objective is to understand better financial crises and debt shocks, and how to reduce their negative impact on society through very different channels and public policies, including macroprudential and monetary policies.