Credit Market Turmoil, Monetary Policy and Business Cycles: an historical

view.

Michael D. Bordo
Rutgers University and NBER

J oseph G. Haubrich
1

Federal Reserve Bank of Cleveland




1
The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank
of Cleveland or the Board of Governors of the Federal Reserve System. We thank Kent Cherny and Sagar
Shah for excellent research assistance, and David Wheelock for sharing data.
1

I. Introduction

Creditmarketdistressarisesinitsmorevirulentformonlyincertainmonetary
environments,andhasitsmostextremeeffectswhenitexacerbatesabusiness
cycledownturn.Policyquestionsaboutacentralbanksroleaslenderoflast
resortorregulatormustbeseeninthecontextofmonetarypolicy.
Therelativelyinfrequentnatureofmajorcreditdistresseventsmakesan
historicalapproachtotheseissuesparticularlyuseful.Usingacombinationof
historicalnarrativeandeconometrictechniques,weidentifymajorperiodsof
creditdistress1875to2007,examinetheextenttowhichcreditdistressarisesas
partofthetransmissionofmonetarypolicy,anddocumentthesubsequenteffect
onoutput.
Theseissuesinvolverelationshipsbetweenpolicyrates(monetary
aggregates)creditspreads,andGDPgrowth.Usingturningpointsdefinedby
theHardingPaganalgorithm,wecomparethetiming,duration,amplitudeand
comovementofcyclesinmoney,creditandoutput.Fortheperiodsincethe
1920s,thisismosteasilydonewithariskspreadbetweencorporateand
Treasurybonds,thediscountrate,andrealGDP.Thisallowsustopickoutand
compareperiodsoftightcreditthatresultfromtightmonetarypolicyandthose
thathaveamoreexogenouscause.Fortheperiodfrom1875to1920credit
spreadsaremeasuredbydifferencesbetweenyieldsondifferentrailroadbonds,
andtheconditionsinthemoneymarketaremeasuredbycommercialpaper
yields.Wealsoexaminethepatternsforrealstockpricessincestockmarket
crashesalsocanactasanexacerbatingfactorincreditturmoil.

Literaturereview

Theeffectofcreditonthebroadereconomyhasbeenofconcerntoeconomists
sincetheearlydaysoftheprofession.Nineteenthcenturyauthorsoftenspokeof
discredit,atermKindleberger(2000)adoptsforthelaterphaseofafinancial
crises.Mitchell(1913)wasanearlyexpositorofthecreditchannelaswas
Hansen(1921),andJ.LaurenceLaughlin(1913)testifiedthattheorganization
creditismoreimportantthanthequestionofbanknotes.Disentanglingthe
impactofcreditsupplyfromchangesindemandaswellasfromthemyriad
2

channelsofmonetarypolicyremainsachallengingempirical(andtheoretical!)
exerciseeventoday.Theimportanceofexpectationinforwardlookingfinancial
marketsindeedforeconomicbehavioringeneralfurthercompoundsthe
problem.
Muchworkhasfocusedonisolatingthecreditchannelofmonetary
policyfromothertransmissionmechanisms.BernankeandGertler(1995)review
thewaysmonetarypolicycanaffecttheexternalfinancepremiumandthecost
andamountofcreditobtainedbyfirms.Thebalancesheet(orbroadlending)
channelaffectsfirm(andindividual)creditworthinessbychangingthevalueof
availablecollateral(BernankeandGertler,1989Mishkin,1978)Thebanklending
(ornarrowlending)channelworksbyrestrictingbanksabilitytoborrowand
subsequentlylendtosmallerfirms(Bernanke,andBlinder,1988).Earlier,of
course,BrunnerandMeltzer(1972)emphasizedtheimportanceofdistinguishing
betweenmoneyandbankcredit.
Thoughagencyproblems,creditrationing,andotherdeviationsfromthe
ModiglianiMillerparadigmprovideabasisforfinancialacceleratormodelsthat
transmittheeffectsofmonetarypolicy,suchfrictionsalsomeanthatcredit
marketscanproduceaswellastransmitshocks.Rajan(1994)showshowbanks
cantransmitbusinesscycleshocksindependentlyofmonetarypolicy,as
reputationalconcernsinduceherdingincreditavailability.GortonandHe
(2008)viewcredittighteningasanincreaseinmonitoringbybanksresulting
fromtheneedtoenforcecollusivebehaviorovertime.
Empiricallytherehavebeenseveralapproachestoidentifyingcrediteffects.
Onelooksatparticularhistoricalepisodesforevidence,andourhistorical
narrativetakesacloserlookatthissectionoftheliterature.Asecondstranduses
microeconomicdataofparticularindustries,oftenlookingatregulatoryorother
changesthatshiftbankportfolios(HaubrichandWachtel1993,BeattyandGron,
2001)ordemonstratethatfinancialconstraintsaffectfirminvestment(Fazzari,
HubbardandPetersen1988,Lamont1997).Athirdstrandexaminesthe
relationshipbetweenbanklendingstandardsasameasureofthecreditcycle.See
eg.AseaandBlomberg(1998),LownandMorgan(2006)andDellArriciaand
Marquez(2006).Andafourthstrandhasworkedtocalibrategeneralequilibrium
modelswithexplicitfinancialfrictions,lookingtoobtaintighterboundsofcredit
3

effects(CarlstromandFuerst1997,Christiano,MottoandRostogno2008),
buildingontheearlierworkofBernanke,GertlerandGilchrist(1996).
Morerecently,therehasbeenrenewedinterestinobservingcorrelations
betweenmacrovariablesacrossbroadrangesofcountriesandtimeperiods,asin
ReinhartandRogoff(2009)andClaessens,Kose,andTerrones(2008).Ourwork
isclosertotheselatterpapersandtherelatedworkofMishkin(1990).Relativeto
MishkinandReinhartandRogoff,wegivegreaterattentiontoallbusiness
cycles,notjustthoseassociatedwithcrises,givingabroaderpictureofthe
relationsbetweenmoney,creditandoutput.RelativetoClaessens,Koseand
TerronesandReinhartandRogoff,welookatonecountry,andareabletogive
greaterdetailontheinstitutionalandhistoricalfactorsatworkintheeconomy.
Forexample,wecancomparehowcontemporaryaccountofcreditconditions
comparewithempiricalmeasuresofcredittightness.
SectionIIpresentsanhistoricalnarrative,providingdescriptiveevidenceon
theincidenceofpolicytightening,bankingandstockmarketcrashes,andcredit
marketturmoilacross27U.S.businesscycles.Thisnarrativeisdesignedto
complementtheempiricalevidenceintherestofthepaperwhereweuse
empiricalmethodstodiscernsignificantpatternsinthedata.Wefocusonthe
relationshipbetweenmonetarypolicy,creditcycles,assetbustsandrealGDP.
SectionIIIdiscussesourmethodology.WeusetheHardingandPagan(2002)
algorithmtoidentifycyclesinmoneycredit,stockpricesandrealGDPandthen
examinetheconcordanceofthesecycles.
SectionIVpresentstheempiricalresults,firstcomparingtheduration,timing,
andamplitudeofcyclesinmoney,credit,andoutput.Severalsetsofregressions
thencomparethedepthofrecessionstothecyclicalmovementsinother
variables.SectionVconcludes.

II. Historical Narrative

Table1presentssomesalientqualitativefeaturesofthe29U.S.businesscycle
recessionsfrom1875tothepresent.Weshowevidenceontheincidenceofbanking
crises,stockmarketcrashes,realestatebusts,tightmonetarypolicy,creditcrunches.
Wealsoprovidebriefcommentsontheunderlyingevents.Figure1showsrelated
dataonrealGDP,thepricelevel,moneysupply(M2),banklending,shortterm
4

interestrates,thequalityspread,theStandardandPoorsstockpriceindex,and
Shillers(2005)indexofrealhouseprices.

1.ClassicalGoldStandardPeriod18751914
From18751914
2
theU.S.wasanopeneconomyonthegoldstandardandhad
significantcapitalinflowsfromEurope,especiallytheU.K..Therewasnocentral
bankbuttheTreasuryonoccasionperformedcentralbankingfunctions.The
countryhadfrequentbusinessrecessionsandalsofrequentbankingpanicswhich
greatlyworsenedthecontractions.Bankingpanicswereendemicinabanking
systemcharacterizedbyunitbanking(withprohibitionsagainstbranchingor
interstatebanking)andtheabsenceofaneffectivelenderoflastresort.Foreign
interestrateshocksastheBankofEnglandperiodicallyraiseditsdiscountrateled
tosuddenstopsincapitalinflows,goldoutflows,declinesinthemoneysupply,
banklendinganddeclinesinrealoutputandprices(Bordo2006).
Theseeventswereassociatedwithstockmarketcrashesandbankingpanics.The
stockmarketwascloselylinkedtothenationalbankingsystemthroughthe
invertedpyramidofcreditwherebynationalbankreservesinthecountryand
reservecitynationalbankswereconcentratedintheNewYorkbanks.These
reserveswereheldascallloansandwereinvestedintheNewYorkStockexchange.
Consequentlyshockstothestockmarketwouldspreadtothebankingsystemand
viceversa(Bordo,RappoportandSchwartz1992).
ContemporariessuchasSprague(1910)discussedthetighteningofbank
creditduringtheseevents.CalomirisandHubbard(1989)presentevidenceof
equilibriumcreditrationingreflectingasymmetricinformationinthecontextofthe
StiglitzandWeiss(1981)model.
3

OfthetenbusinesscyclesforthisperiodcoveredinTable1,threehadserious
bankingpanics,withmildorincipientpanicsinanotherfour.Deeprecessionswere
associatedwiththebankingpanics.Sevendownturnswereassociatedwithstock
marketcrashes.Thereisnoevidenceofnationalrealestatebustsinthisperiod

2
From 1875 to J anuary 1, 1879 the U.S. was still on the floating Greenback Standard. However the
Resumption Act of 1875 anchored expectations on the announced return to gold parity and the dollar pound
exchange rate was very close to parity Bordo, Erceg and Levin 2007).
3
Bordo, Rappoport and Schwartz ( 1992) provide evidence doubting the presence of credit rationing in the
National Banking era. They argue that it is difficult to distinguish credit shocks from shocks to the money
supply. They explain most of the variation in national bank lending by the movement of stock prices held
as collateral.
5

althoughthereweresomefamousregionalbusts,eg.Californiainthe1890s.In
threeoftherecessionsassociatedwithpanics,BankofEnglandtighteningleadingto
suddenstopofcapitalinflowswaslikelythesourceoftheshock.Inaddition
monetarytighteningcontingentonthefearthatlegislationassociatedwiththeFree
Silvermovement(BlandAllisonActof1878andtheShermanSilverPurchaseActof
1893)likelyledtothepanicof1893andthecurrency(andminorbanking)crisisof
1896(FriedmanandSchwartz1963,Gorton1987).AccordingtoCalomirisand
Hubbard(1989)citingSpragueandothers,creditcrunchesoccurredinthemajor
recessions.

ImportantEpisodes
1873.AseriousinternationalcrisiswithoriginsinarealestatebustinViennaand
BerlinwasintheU.S.associatedwithcorporatemalfeasanceinthedominant
railroadsector(BenmelechandBordo2008),astockmarketcrashandabanking
panicwithwidespreadbankingfailures.Thepanicendedwiththesuspensionofof
convertibilityofbankliabilitiesintocurrency.Theevidenceoffraudinrailroads
precipitatedasuddenstopincapitalinflowsfromEngland.Theresultantrecession
lasteduntil1879.Mishkin(1990)providesevidencethataqualityspreadbetween
MoodysBaacorporatebondrateandthelongtermTreasurybondratespikedafter
thebankingpanicandstockmarketcrash.Thisiscitedasevidenceforthepresence
ofdecliningnetworthandasymmetricinformation,whichinturnincreasedagency
costsandreducedbanklending.

1893.Aseriousbankingandstockmarketcrashinthesummerof1893wastriggered
bythepassageoftheShermanSilverPurchaseActwhichledtofearstheU.S.would
beforcedoffthegoldstandardandtocapitalflight.Inthecrisishundredsofbanks
failed.AttemptsbytheNewYorkClearingHousetoissueclearinghouseloan
certificatesdidnotstopthepanic.Itendedwiththesuspensionofconvertibility.As
inthecrisisof1873,CalomirisandHubbardciteevidenceofequilibriumcredit
rationing,eg.Stevens(1894)wholesaletransactions[are]usuallydoneoncredit.
[New]generalbusinesswasbeingdonealmostonacashbasispage141,and
Mishkin(1990)showsthequalityspreadpeakswiththecrisis.Thecontractionof
lendingbythebankingsystemasaresultofitstroublereduceditsroleinsolving
6

adverseselectionandagencyproblemsandclearlymadetheseproblemsworsein
thefinancialmarkets(page19).

1907.Thisseriousrecessionwasalsoaccompaniedbyabankingpanicandstock
marketcrash.ItmayhavebeentriggeredbyBankofEnglandtighteningin1906in
reactiontoagoldoutflowtotheU.S.tocoverinsuranceclaimsfromtheSan
Franciscoearthquake(OdellandWeidenmeir2004).IntheU.S.thecollapseofa
cornerofthecoppermarketinOctoberledtothefailureof8banks,followedbythe
failureoftheKnickerbockerTrustCompany.Thisledtoarunontheothertrust
companiesandthenageneralpanic.Theissueofclearinghouseloancertificates,the
transferoffundsfromtheTreasurytokeyNewYorkbanksandarescuebya
syndicateorganizedbyJ.P.Morganalleviatedthepressure,butthepaniconly
endedwiththesuspensionofconvertibility.Thepanicwasassociatedwith
hundredsofbankfailures,asignificantdropinmoneysupplyandadeeprecession.
Asinotherpanicepisodes,CalomirisandHubbardcitecontemporaryevidencefora
creditcrunch.Persons(1920)discussesahaltinfurthercreditexpansionpage147;
Sprague(1910)Itwouldseem,then,pastbusinessdistressfromlackofcredit
facilitieswasdueatleasttothreeinfluences:therestrictionofcashpaymentsbythe
banksincreasedtherequirementsofborrowers;thesupplyofloanswasreducedby
amoderateamountofcontraction;andtheshiftingofloansinvolvedconsiderable
uncertaintyandinconveniencespage303.Mishkin(1990),asinthepreviouscrisis
showsaspikeinthequalityspread.Accordingtohimthedeclineinthevaluation
offirms[inthestockmarketcrash]raisesadverseselectionandagencyproblemsfor
borrowingfirmsbecauseithasineffectloweredtheirnetworth.Theresulting
increasesinasymmetricinformationproblemsevenbeforetheOctoberbanking
panic,shouldraisethespreadbetweeninterestratesforhighandlowquality
borrowers.Theprocessofsevereasymmetricproblemsevenbeforethebanking
panicsuggeststhattheywerepotentiallyimportantfactorsincreatingasevere
businesscyclecontraction.pp2127.

1914.TheoutbreakofWorldWarIledtoamassivecapitaloutflowfromU.S.
financialmarketstothebelligerents.ThismassivesuddenstopthreatenedtheNew
Yorkstockmarket,thebankingsystemandU.S.goldreserves.TreasurySecretary
McAdooinvokedtheAldrichVreelandActtoissueemergencycurrencytoallaythe
7

bankingpanic,closedtheNYSEandpooledU.S.goldreserves.Thecrisiswas
largelyaverted.Thereisnonarrativeevidenceofacreditcrunch.

2.19181945
TheFederalReservewasestablishedin1914inparttosolvetheabsenceofalender
oflastresortinthecrisesofthepre1914NationalBankingera.Initsfirst25years
therewerethreeveryseverebusinesscycledownturns:192021,192933and1937
38.Allthreewereassociatedwithverytightmoney.The192933recessionhadfour
bankingpanicsproducingtheGreatContraction.Thestockmarketcrashedin1920,
1929,193032and1937.AccordingtoWhite(2008)therewasarealestateboombust
inthe1920sandanotherin192933.Thereisconsiderableevidenceforcollapseof
banklending(acreditcrunch)in193033and193738.AccordingtoBernanke(1983)
boththenumerousbankfailuresthatoccurredandthecollapseinnetworthbrought
aboutbybankruptcies,fallingassetpricesanddeflation,increasedthecostofcredit
intermediationandreducedrealoutputoverandabovetheeffortsofadeclinein
moneysupplypositedbyFriedmanandSchwartz(1963).

192021.
TheFedtighteneddramaticallyraisingitsdiscountrateinlate1919torollbackthe
inflationthathadbuiltupduringWorldWarIandtorestoreeffectiveadherenceto
thegoldstandard.Thisfollowedaseverebutbriefrecession(industrialproduction
fell23%,wholesalepricesfell37%andunemploymentincreasedfrom4%to12%)
possiblybecauseFedactionswerenotanticipated(Bordo,ErcegandLevin2007).No
bankingcrisesoccurredbuttherewasastockmarketcrashaccordingtoMishkin
andWhite(2002).Alsothereisnonarrativeevidenceforacreditcrunch,the
transmissionoftightmoneyoccurredthroughariseinrealinterestrates(Meltzer
2005p.118).

192933
TheFedtightenedbeginninginearly1928tostemthestockmarketboomwhich
beganin1926.ThistighteningledtoarecessioninAugust1929andastockmarket
crashinOctober.TheNewYorkFedinitiallyfollowedexpansionarypolicyto
preventamoneymarketpanicinOctober.Itthenstoppedeasingbytheendofthe
year.DespitedemandsfromNewYork,theFederalReserveBoardinWashington,
8

followingtherealbillsdoctrine,wasconcernedaboutrekindlingstockmarket
speculation.AseriesofbankingpanicsbeginninginOctober1930ensued.TheFed
didlittletooffsetthemhenceallowingtherecessiontobecomeadepression.
AccordingtoFriedmanandSchwartz(1963),thebankingpanicsreducedthemoney
stockbyathirdandledtosimilardeclinesinrealoutputandprices.Theprocess
wasaggravatedbydebtandassetpricedeflation.AccordingtoBernanke(1983)the
bankfailuresandthecollapseofnetworth(Mishkin1978)raisedthecostofcredit
intermediationseeninanincreaseinqualityspreads.Inaddition,Calomirisand
Mason(2003)andCalomirisandWilson(2004)identifytheshockstobanklending
(creditcrunch)usingrespectivelyapanelofbankdatabystatesandbyNewYork
Citynationalbanks.

193738
RecoveryfromtheGreatContractionbeganwithRooseveltsBankingHolidayin
earlyMarch1933andTreasurygoldpurchases(Romer1992).Itwasslowed
somewhatbythesupplyshocksoftheNIRA(ColeandOhanian2004).Asecond
severerecessionin193738wasproducedbyamajorFedpolicyerror.Itdoubled
reserverequirementsin1936tosopupbanksexcessreserves.Thisledtoanother
collapseinmoneysupplyandareturntosevererecession.BothBernanke(1983)and
CalomirisandWilson(2004)seeevidenceforadeclineinthesupplyofbankloans
(acrunch)inresponsetodeflationanddecliningnetworth.

3.19451980
TheFedemergedfromWorldWarIIstillpeggingTreasurybondprices.Thispolicy
ledtohighinflationwhichendedwithtighteninginOctober1947(Romerand
Romer1989)thatledtoarecessionin1948.ThefamousFederalReserveTreasury
accordof1951restoredFedindependence.Thenext15yearswascharacterizedby
relativelystablemonetarypolicy(Meltzer2004).TheFedunderWilliamMcChesney
Martininthe1950sviewedpricestabilityasitsprimaryobjective.Onseveral
occasions,whenfacingincipientinflation,theFedtightened,precipitatinga
recession.
Inthepostwarperiodtherewerenobankingpanicsandnoseriousstock
marketcrashes.However,accordingtoWojinlower(1980,1982,1992),Credit
crunchesoccurredwhentheFedtightenedraisingshortterminterestrates.Asrates
9

increasedabovetheRegulationQceilingontimedeposits(andlateronCDs)thisled
todisintermediationoffundsfromthebankingsystemandadeclineinbank
lending.Suchdisintermediationcrunchesweresaidtohaveoccurredin1953,1957
and1960.
Thetermcreditcrunchwascoinedin1966.TheFedtightenedinDecember
1965atthebeginningoftheGreatInflationbyraisingthediscountrateby50basis
pointsto4%.Disintermediation,asratesroseabovetheRegulationQceiling,
waspreventedbytheFedraisingtheceilingrateto5%.Continuedconcernbythe
FOMCoverinflationarypressurecomingfromhigherratesledtheFedsbank
regulatingagenciestoissueastatementinMarchurginglendingrestraintbythe
banks(OwensandSchreft1993page8.)
FurtherstatementsurgingnonpricecreditrationingcamefromtheHouse
BankingandCurrencyCommittee.ThiswasechoedinareportbytheAmerican
BankingAssociation.TheninJuly1966inthefaceofrisingprimerates,TheFOMC
allowedRegulationQtobindandbanksexperiencedanoutflowoffunds.On
September1,theFedsentalettertoallmemberbanksurgingthemtoslowthe
growthoftheirbusinessloanportfolios(OwensandSchreft1993page15.)The
creditcrunchledtoaslowdowninbanklendingandeconomicgrowthandon
September21theCongresspassedalaw(whichtheFedendorsed)urgingitto
reduceinterestratesasmuchaspossiblegivenprevailingeconomicconditions
(OwensandSchreft1993page16).Thecrunchended.
Asimilarsequenceofeventsoccurredin1969.Inearly1969,theFedbegan
tighteningtosteminflationarypressure.Disintermediationoccurredasmarketrates
exceededtheRegulationQceilings.Todiscouragebanksfromraisingtheirrates
(whichwasdeemedtobeinflationary)theFedandtheAdministrationurgedthe
banksinthespringtorestricttheirlending.Jawboningacceleratedasthesummer
began.Bowingtopoliticalpressurethemajorbanksrefrainedfromraisingtheir
primeratesfurtherinthelatterhalfof1969despitestrongloandemandandrising
loanrates.[Thebanks]insteadreliedmoreheavilyonnonpricecreditallocation
methods(OwensandSchreft1993page22).Loandemandslowedbytheendof
1969astheeconomyslippedintorecession,endingthecreditcrunch.
In1973,theFedagaintightenedtofightinflation.Toensureagainstacredit
crunchtheFedinMaysuspendedRegulationQceilingsonlargeCDsandraised
ceilingsonotherdepositcategories.Atthesametimeitraisedmarginalreserve
10

requirements:apparentlyithadshiftedtoapolicybasedonthepricemechanism
ratherthancreditavailability.
4
(OwensandSchreft1993page26).YetonMay22,
ChairmanBurnswrotealettertobankersaskingthemtoallocatecreditthrough
nonpricerationinginsteadofraisingratesfurther(ibid).TheFedcontinuedto
tightenthrough1974byrepeatedhikesinthediscountratebutceasedpressuring
thebankswithnonpriceallocationtechniques(ibidpage28).

4.19802007
Inflationcontinuedunabatedthroughthe1970s.Debateswirlsoverthecausesof
theGreatInflation19651982.Someobserversattributeittotheaccommodationof
expansionaryfiscalpolicy,otherstothePhillipsCurvetradeoffandanunwilling
nessdrivenbypoliticalpressuretoraiseunemploymentattheexpenseofinflation
andotherstomeasurementerrorsinestimatingpotentialoutput(Bordoand
Orphanides2009).Finallyinthefaceofanexchangeratecrisisandgrowingpopular
discontent,PresidentCarterinOctober1979appointedPaulVolckerasChairmanof
theFederalReserve.MonetarypolicytightenedsignificantlyasVolckereffectively
targetedmonetaryaggregatesinsteadofinterestrates,andproducedaseriesof
sizeablehikesinthefederalfundsrate.Howeverthetightmonetarystancewas
temporarilyabandonedinmid1980aseconomicactivitydeceleratedsharply.
InMarch1980attherequestoftheCarterAdministration,asasignaltothe
publicinanelectionyearofitswillingnesstofightinflation,theFedimposed
selectiveconsumercreditcontrols.Thecontrolsinvolveddirectrestrictionsonbank
loangrowth.TheFedprovidedbroadguidelinesforcreditallocationsuggestingfor
examplethatbanksavoidmakingunsecuredconsumerloans(OwensandSchreft
1993page30).Theprogramledtoamarkeddeclineinconsumercreditaslending
rateshitbindingusurylawceilings.Thisreducedpersonalconsumption,
contributingtoaverysharpdeclineineconomicactivity.Thecontrolswereliftedin
July1980.
TheFederalReserveembarkedonanewroundofmonetarytighteninginlate
1980.Thefederalfundsrateroseto20percentinlateDecember,implyinganexpost
realrateofabout10percent(Bordo,ErcegandLevin2007).NewlyelectedPresident
ReaganssupportofVolckerspolicywassignificantingivingtheFederalReserve

4
According to Owens and Schreft (1993) the 1973-74 episode was not a true credit crunch which they
define as non price credit rationing because bank lending rates were permitted to rise.
11

themandateitneededtokeepinterestrateselevatedforaprolongedperiod,and
providedsomeshieldfromgrowingoppositioninCongress(Feldstein1993).This
secondandmoredurableroundoftighteningsucceededinreducingtheinflation
ratefromabout10percentinearly1981toabout4percentin1983,butatthecostof
averysharpandveryprolongedrecession.Inthisepisodethereisnonarrative
evidenceofacreditcrunch.
Therecessionof199091wasprecededbyFedtighteningbeginningin
December1988(RomerandRomer1994).ItcoincidedwiththefirstGulfWar.There
wasnobankingcrisisbuttherewasastockmarketcrashinAugust1990.Therealso
wasnotarealestatebustalthoughrealhousepricesdeclined13%19891993.
AccordingtoBernankeandLown(1991)therewasacreditcrunchwhichtheydefine
asasignificantleftwardshiftinthesupplyofbankloansholdingconstantthesafe
realinterestrateandthequalityofpotentialborrowers.Accordingtothema
collapseinNewEnglandrealestatereducedtheirequitycapitalandforcedbanksto
scalebacktheirlending.Thisreducedaggregatedemandviathelendingchannel
(BernankeandBlinder1988)andcontributedtotherecession.
OwensandSchreft(1993),whodefineacreditcrunchasnonpricecredit
rationing,alsopositthattherewasacreditcrunchinthecommercialrealestate
market,asectorspecificcreditcrunchthatpreventedcommercialrealestate
developersandbusinessborrowersusingrealestateascollateralfromgettingcredit
atanyprice(page50).
Therecessionof2001wasprecededbyamildtighteningofmonetarypolicy
(thefundsratewasraisedfrom41/2%inNovember1998to6%inMay),andthe
collapseofthetechboominthestockmarketinthespringof2001.Thereisno
narrativeevidenceofarealestatebustoracreditcrunch.
FinallytherecessionwhichbeganinDecember2007wasprecededbyFed
tighteningbeginninginJune2004following3yearsofexcessivelylowrates.The
lowpolicyratesaswellasaglobalsavingsgluthelpedfundahousingboomwhich
begandeflatingattheendof2006.Theensuinghousingbustinitiallycenteredon
theU.S.subprimemortgagemarketinthespringof2007.Factorsbehindtheboom
inadditiontolowinterestratesincludeU.S.governmentinitiativestoextendhome
ownership,changesinfinancialregulation,laxoversightandtherelaxingofprudent
standards(Bordo2008).
12

Thedefaultonsubprimemortgagesproducedspillovereffectsaroundtheworld
viathesecuritizedmortgagederivativesintowhichthesemortgageswerebundled,
tothebalancesheetsofinvestmentbanks,hedgefundsandconduitswhich
intermediatebetweenmortgageandotherassetbackedcommercialpaperandlong
termsecurities.Theuncertaintyaboutthevalueofthesecuritiescollateralizedby
thesemortgagesledtothefreezingoftheinterbanklendingmarketinAugust2007
andsubsequentlytoamassivecreditcrunch.Thecollapseincreditreflectedasevere
dropinassetpriceswhicherodednetworthandcollateralgreatlyincreasingagency
costsandqualityspreads.Inadditiontheweakeningofmajorbanksbalancesheets
hasimpairedtheirlending.Thishasbeengreatlyaggravatedbyamorethan50%
dropinstockprices.Despiteextensivecentralbankliquidityinjectionsandthe
creationofanumberoffacilitiesattheFedtorejuvenatethecreditmarkets,the
crunchstillprevails.ThecreditcrunchhasproducedaseriousrecessionintheU.S.
whichhasspreadtotherestoftheworld.

III. EmpiricalMethodology
Withanaimofexaminingcyclesinmoney,creditandoutputsince1875,data
availabilityandconsistencybecomekeyissues.Forbusinesscycles,weusethe
NBERchronology(ataquarterlyfrequency).ForRealGrossNationalProduct(note
itisGNP,notGDP)weusethenumbersfromBalkeandGordon(1986),extended
viatheNIPAaccounts.Likewiseforthemoneysupply,weusetheM2numbers
fromBalkeandGordon,splicedandupdatewiththeM2numbersfromtheBoardof
Governors.Formanyotherseries,1919becomesanaturalbreakpoint.Forthe
interestrate(risk)spreadin1919andafter,weuseMoodysSeasonedBaaCorporate
BondYield(%p.a.)lessLongTermTreasuryComposite,Over10Years(%p.a.).For
theearlierperiod,weconstructadifferencebetweenaveragesofthehighyielding
andlowyieldingrailroadbondyieldstakenfromMaCaulay(1938)
5
.MaCaulayis
alsothesourceforearlyvaluesofcommercialpaper.Thediscountratesince1945is
theratefromtheBoardofGovernorsandpriortothatistherateattheFederal
ReserveBankofNewYork,fromBankingandMonetaryStatistics(1943).Thestock
priceindexfor18751917istheCowlesCommissionindex,itsleveladjustedto

5
For 1914 quarter 3, the markets were closed, and we entered a judgmental value of 1% for the spread. As
this was a time of turmoil in the markets, it is not an innocuous assumption.
13

matchtheStandardandPoorsindex,whichbeginsin1917.Realestatepricesare
fromShiller(2005).

Methods
Afocusonrecessionsandcontractions,creditcrunchesmonetarypolicymakesit
naturalthattheempiricaltechniquesshouldbeconsistentwithsuchacyclical
focus.Fortunately,thesuiteoftechniquesdevelopedbyHardingandPagan
(2002,2006)providesareadyfitwiththeclassicalNBERdiscussionofbusiness
cycles.InthispaperwewillusethemethodsofHardingandPagantoextract
turningpointsintheseriesformoney,creditspreads,andstockpricesand
comparethecharacteristicsofthosecyclestotheNBERcycle,concentratingon
contractions.
Thefirststepmustbetoidentifycyclesviatheirturningpoints.The
NBERdoesthisviathebusinesscycledatingcommittee,butBryandBoschan
(1971)developanalgorithmthatcloselymimicsthecommitteesdecisionsata
monthlyfrequency.HardingandPagan(2002)extendthealgorithmtoa
quarterlyfrequency,whichmatchesthefrequencyofourdata.
Anysuchalgorithmneedsthreecomponents.First,awaytoidentify
turningpoints,essentiallychoosinglocalmaximumsandminimums.Fora
quarterlyfrequency,HardingandPaganlooksforadatapointthatisalocalmax
orminfortwoquartersoneitherside,thatis,y
t
isacyclicalpeakif
y
t
= max|y
t-2
, y
t-1
, y
t,
y
t-1,
y
t+2
|.
Secondly,theproceduremustmakesurepeaksandtroughsalternate.Finally,it
shouldimposecensoringrulestoobtaincyclesoftheappropriatelength(for
example,withouttheseanalgorithmmaypickoutseasonalcycles,thoughthisis
lesslikelyinquarterlydata.)WeusetheRATSquarterlyimplementation
(bryboschan.src).
Oncedefined,itbecomespossibletomeasurecyclecharacteristics.
Primarily,theseare
i) Duration:thelengthofthecycleanditsphases(alongwithnoting
theasymmetrybetweenphases)
ii) Amplitude:changeinvaluebetweenturningpoints
iii) Shape,sometimescalledcumulativemovement,todistinguishhow
steeplytheeconomycontractsorrecovers.
14

Tomeasurecomovementinwhatareoftennonstationaryseries,Hardingand
Paganproposeameasureofsynchronizationbetweencycleswhichtheyterm
concordance,essentiallyameasureofhowoftentwoseriesareinthesamephase
ofthecycle.Denotetheperiodsthatseries
t
spendsinanexpansionasS
t
= 1
andthetimespentincontractionasS
t
= u.ThentheconcordanceC
x
between
seriesxandseriesyisdefinedas
C
x
=
1
n
|#|S
xt
= 1, S
t
= 1| + #|S
xt
= u, S
t
= u|].
Twoperfectlyprocyclicalserieswouldhaveaconcordanceof1,withperfect
countercylcalityhavingaconcordanceof0.Suchperfectalignmentisneverseen
ineconomictimeseries,soitismoreusefultocomparetheseriestothestandard
ofindependence,orwhatHardingandPagantermstrongnonsynchronization.
Theconcordanceassociatedwithnonsynchronizationdependsstronglyonthe
asymmetryofthephases;ifbothserieswereincontractions99percentofthe
time,theywouldshowahighconcordanceeveniftheywereindependent.The
mostusefulcomparisonisthenwiththeexpectedconcordance
S (1 - E|S
xt
])(1 - E|S
t
]) E|C
x
] = E|S
xt
]E|
t
] +
WhereofcourseE|S
xt
] = prob(S
xt
= 1).Ahigherconcordanceindicates
procyclicalityandalowerconcordanceindicatescountercyclicality.Hardingand
Pagan(2006)alsoprovidearegressionbasedtestofindependencethatwereport
below.
Twocyclesmaybestronglynonsynchonizedandstillinfluenceeach
other;forexample,anoverlappingcontractionmightinfluencethedepthofthe
recession.
Lookingatthecycleoverlapsprovidesmoreinformationaboutthe
empiricallinkagesbetweenmoney,credit,andthebusinesscycleovertheyears
from1875to2007.Weexplorehowmoney,credit,andassetpricesbehavein
recessionsandlookathowrecessionsdifferaccordingtothewhetherornotthey
areassociatedwithcreditcrunches,tightmoney,andassetpricedrops.INthis
wearebroadlyfollowingthemethodsofReinhardtandRogoff(2008)and
Claessens,Kose,andTerrones(2008).
Wepresenttwosetsofregressions.
Thefirstsetregressestheamplitudeofthepercentagepeaktotrough
changeinRealGNPagainstthechangesincreditspreads,measuresofmoney,
andthestockindexbetweenthesameNBERturningpoints.
15

Thesecondsetofregressionslooksathowmonetary,credit,andasset
cyclesaffectthebusinesscycle.Forexample,dorecessionsthatstartduringa
creditcrunchlookdifferentthanthosethatdont?EachNBERcontractionis
associatedwiththemoney,credit,orassetcyclephasethatitstartsin.The
amplitudeofthecontractionisthenregressedagainsttheamplitudeoftheother
cyclephases.Forexample,arecessionthatstartsinaperiodoftighteningcredit
andtighteningmonetarypolicyisassociatedwiththeamplitudesofthosetwo
contractionphases.

IV. EmpiricalResults
Cyclecharacteristics
Inoursample,from1875:Ito2007:III,wehave27(NBER)recessions,counted
as complete peak to troughepisodes.Tables 2and 3reportthe meanamplitude
anddurationofcyclesforthe1875:I1918:IVperiod,andtables4and5reportthe
amplitude and durations for 1919:I2007:IV, calculated for the peaktotrough
andtroughtopeak.Ifthebeginningquartersbelongtoacontractionthatstarted
before our sample, those are not counted. Likewise for an expansion that
continuesbeyondoursample.
The average duration of a recession (peak to Trough) is 15.4 months, that of
anexpansion39months.Becauseofdatalimitations,weseparatelylookattwo
subsamples, from 1875:I to 1918:IV and from 1919:I to 2007:IV, the period for
which we have Federal Reserve discount rate data. For the later period,
recessionshaveshortenedandexpansionslengthened.Fortheearlyperiod,the
average duration of a recession is 6 quarters (8.3 for expansions). For the later
period,thedurationsare4.5forcontractions,17.7quartersforexpansions.
Creditshowsalongercycle.Fortheearliersample,ourmeasureofcredit
is the spread between different rail road bonds. These show a mean peakto
trough duration of 8.25 quarters, and a troughtopeak duration of nearly 10
quarters, as well as showing noticeably longer maximum cycles. Also note the
greater symmetry between expansions and contractions in the credit spread
series.Forconsistency,thePTofratesandspreadsshouldbecomparedtotheT
P of RGNP. For the later sample, using the spread between Moodys seasoned
Baa corporate bond yield less the longterm treasury composite, contractions,
or periods of generally falling spreads, last an average of 11.1 quarters, longer
16

than the NBER contractions, but the periods of expansion or rising spreads,
lastsonly8.4quarters,significantlyshorterthanthe17.7ofNBERexpansions.
What about monetary policy? For the earlier period, we use two
measures. The first is Balke and Gordons measure of M2, taken as the year
overyear log difference. Mean peaktotrough duration is 7.5 quarters,
measuring9.9quartersforthetroughtopeakexpansions.Thisindicatesacycle
lengthsimilartotheNBERcycleandabitshorterthanthecreditcycle.Wealso
usethecommercialpaperrateasameasureofmonetarytightness.Thisseemsto
exhibitashorterandlessvariablecycle,withexpansionsandcontractionsof6.75
and 5.5 quarters. For the later period, we continue with the Balke and Gordon
M2 series, splicing in the Board of Governors M2 when it becomes available.
LiketheNBERcycle,itisratherasymmetric,andperhapsnotsurprisingly,with
contractions nearly twice as long as expansions. The discount rate, our other
measure of policy, exhibits even more asymmetry, with mean peaktotrough
duration of nine quarters and mean troughtopeak duration of over twenty.
(againnotethatacontractioninthemoneysupplyprobablycorrespondstoan
expansion in the discount rate.). Over all it is noticeably longer than the
businesscycle.
In the later period, recessions tend to occur in an environment of
monetarytighteningandtightercredit.Ofthe17NBERbusinesscyclepeaksin
thesubsample,4occurredinthesamequarterasthepeakinthemonetarypolicy
(discount rate) cycle, another 9 occurred during the tightening phase of policy,
and2occurredinthequarterimmediatelyafterapeakinthediscountratecycle.
Fourteenofthe17occurredinperiodsofcredittightening.
In the earlier period, the pattern repeats. Recessions tended to occur in
time of monetary tightening, with all eleven NBER recessions occurring in a
contractionary phase of M2 growth, and ten of the eleven occurring in an
environmentofrisingcommercialpaperrates.Thesewerealsogenerallyperiods
of tightening credit, though the pattern is not quite so obvious: in seven of the
elevencasesrailroadspreadswereincreasing.
Tables 6 reports the concordances and tests of synchronicity for the 20
th

century.Recallthatanactualconcordanceaboveexpectedconcordanceindicates
seriesthatmoveprocyclically.Mostinterestingforourpurposesisconcordance
with the NBER cycle, though we find it gratifying that the discount rate moves
17

countercyclicallywithM2.FortheNineteenthcentury,wefindevidenceforthe
importance of credit in that the Baa spread moves countercylically to the
business cycle: increasing risk spreads are associated with recessions. The
evidence for money is mixed, with the discount rate showing procyclical
concordance,butwecannotrejectindependenceforthelogdifferenceofM2.
Table 7 reports on concordance and synchronicity tests for the 19
th

century.Theriskspread(onrailroadbonds)isagainprocyclical,butsignificant
only at the 10 percent level. Money is again mixed, with short rates showing
procyclicalitybutquantityshowingindependence.
Regressions
The questions of whether larger changes in money, credit or asset prices
are somehow associated with different amplitudes of contractions can be
addressed in several ways. Following Claessens, Kose and Terrones, Tables 8
and 9 report regressions of recession amplitude against changes in the risk
spread, money measures, and stock prices over the same dates as the NBER
peaktotroughphase.Forbothtimeperiods,thecoefficientontheriskspreadis
negative,indicatingthatlargerchangesinriskspreadsareassociatedwithlarger
amplitudes (to be clear, a rise in the spread from the business cycle peak to
troughcomesinasnegative,whileforRGNP,measuredaspeakminustrough,is
positive).Thepositive(andgenerallysignificant)coefficientonthechangeinthe
stock index indicates larger stock price drops are associated with larger
contractionamplitudes,thatis,deeperrecessions.Offurtherinterestarethetwo
interactionterms,onefortheriskspreadandthemoneygrowth,andthesecond
forriskandtheshortterminterestrate.ThecoefficientonInteraction1indicates
thattimesofrisingriskspreadsandtightmoneyareparticularlyassociatedwith
highamplitudes.
AnotherapproachistorelatetheamplitudenottochangesovertheNBER
contraction,butoverthecyclephasesformoney,creditandstockpricesthatthe
HardingPaganalgorithmidentifies.Claessens,KoseandTerronescomparethe
depthofrecessionswithlargeandsmallcreditcrunches.Withfewerrecessions,
we take a more multivariate approach, and regress recession amplitude against
cycle amplitude for the risk spread, the money measure (either quantity or
shortterm interest rate) and the stock price. For example, if a recession begins
(e.g. a peak occurs) when the money supply is in a contraction phase, we
18

associate the amplitude of the NBER recession with the amplitude of that
monetary contraction (which will rarely have the same turning points or
duration).Tables10and11reporttheresultsforthe19
th
and20
th
centuries.The
results are broadly similar to those in the NBER focused regression of Tables 9
and10,buttherearesomedifferences.Thecoefficientontheriskspreadshows
up as positive in the 20
th
century. The stock index remains positive and
significant,exceptwheninteraction2isadded.
Both the historical narrative and the empirical results suggest that a
confluence of financial shocksin risk spreads, assets prices and money
supplywill exacerbate a contraction, or at least be associated with deeper
contractions. A closer look that the deeper recessions in our sample bears this
out, even though the correspondence between financial shocks and depth of
recession is not onetoone. Figures 2 and 3 provide scatterplots of recession
amplitude against the risk spread, shortterm rates, money supply, and stock
movements.
SincetheFirstWorldWar,fourrecessionareparticularlydeep(measured
as percent change in real GNP from peak to trough): those of 1929, 1945, 1920,
and 1937. These were at least triple the size of any other contraction (with a
possible exception of the combined 19801981 drop). 1945 stands out as an
anomaly, but the other three stand out as having the three largest drops
percentage drops in the money supply and stock prices, and two of the three
largest increases in the risk spread. Contemporary accounts of the 1920
contraction do not mention a credit crunch in line with the only moderate
increaseintheriskspreadinthatcontraction.
PriortotheFirstWorldWar,threecontractionsstandout,allovertwiceas
deep as the others: 1907, 1893, and 1913. The connections with financial shocks
are perhaps not as striking as for the later period, but still strong. The three
contractions have two of the top three declines in stock prices, and the top two
changes in money and bond spread. Contemporary accounts noted a credit
crunchin1893despiteonlyasmallmovementintheriskspread.
An alternative approach is to sort on the size of movements in risk
spreads, money and stock prices, looking to see if larger movements in these
variables leads to larger recessions. Since World War I, four contractions had
particularlylargeincreaseintheBaaspread,fourhadparticularlylargedropsin
19

M2(infactonlyfoursawactualdrops)andfourhadparticularlylargedropsin
stockprices.Table12comparesthemeanrecessionamplitudefortheseextreme
events with recession amplitudes without those events. If youwill, picking out
thecreditcrunchesand thestockcrashesfromthe merecorrections. Itmakes a
similarcomparisonbetweenthethreelargesteventsineachcategoryforthepre
worldwarIcycles.Ineverycase,thecontractionsassociatedwithalargecrunch
or crash are noticeably larger than those without, though this difference is
statisticallysignificantonlyforthepreWWIyears.

VConclusions
The evidence, though not conclusive, indicates both that more severe financial
eventsareassociatedwithmoresevererecessions,andthataconfluenceofsuch
eventsalsoindicatesincreasedseverity.
TheempiricalresultscomplementthecrosscountryevidenceofClaessenset
al,andReinhartandRogoff.Causalityisofcoursealwayshardtodetermine,but
the narrative evidence strongly suggests, and the empirical work is at least
consistent with, the claim that credit turmoil worsens recessions. The timing of
cycles is likewise consistent with the work of Gilchrist, Yankov and Zakrajsek
(2008)andothersontheabilityofcorporatebondspreadstopredictrecessionin
morerecentperiods.
The results are consistent with work, such as Barro and Ursua (2009), who
findahighassociationbetweenstockmarketcrashesandlargecontractions,and
Claessens et al who find an interaction between stock market crashes and tight
moneyandcredit.
Somewhat paradoxically, the cycles in the quantity of money appear not to
be synchronized with business cycles, when the cycles coincide monetary
tightening has a significant effect, and seems implicated in major recessions.
Money market measures, such as the discount rate, show greater synchronicity,
but not more significant correlations. The historical evidence of banking panics
associated with credit turmoil makes a case for the central bank acting as an
lenderoflastresort.
The current episode combines elements of a credit crunch, asset price bust
and banking crisis. It is consistent with the patterns we find using 140 years of
US data. How does the current crisis measure up? Starting from August, 2007,
20

the difference between the yield on Baa bonds and longterm Treasuries has
moved up 393 basis points, a larger increase that seen in the 1929 contraction,
and approaching the combine increase of 436 bp over both the Depression
contractions.ThepercentagedropininS&Pindexof44.5%issecondonlytothe
78% of the Great Contraction. Money supply, however, is a different matter,
withanincreaseof15.2%inthecurrentperiod,thelargestincreaseofM2seenin
any contraction. This should not be particularly surprising, however. As
Friedman and Schwartz point out, prior to deposit insurance banking panics
would cause a collapse in the money multiplier, driving M2 down. Zarnowitz
(1992) shows that businesscyclesdownturnswithpanics are muchmore severe
than others. Today because of deposit insurance etc financial turmoil does not
lead to panics and collapses in the money multiplier, and credit turmoil is less
likely to feed into the money supply. The credit disturbance thus becomes
relatively more important, given that disturbances on the asset side of the
balancesheetnolongerhaveasstronganinfluenceonthemoneysupply.

21

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27

TABLE 1:Descripti ve Data 1873-2008
NBER
Business
Cycle Peak

Banking
Crises

Stock
Market
Crash

Real
Estate
Bust

Tight
Monetary
Policy

Credit
Crunch

Comments

1 October
1873
September
1873
September
1873
no Bank of
England
tightens
? International Financial
Crisis; real estate bust
in Germany, Austria;
Railroad scandal stock
market crisis and
serious recession
focused on railroads.
Panic ends with
suspension of
convertibility.
2 March 1882 J une 1884 February
1884
no no yes
1
Minor panic
consequent upon
failure of Grant and
Ward, attenuated by
NY clearing house.
3 March 1887 no no no no no Minor recession
4 J uly 1890 November
1890
November
1890
no Bank of
England
tightens
no Baring crisis in
London caused by
Argentine defaults.
Bank of England
tightening leads to
sudden stop, minor
banking panic
attenuated by NY
clearing house.
5 J anuary
1893
May 1893 May 1893 no Silver risk yes
1
Major U.S. banking
panic related to fears
U.S. would be found
off gold standard after
passage of Sherman
Silver Purchase Act.
Panic ends with
suspension of
convertibility.
6 December
1895
October
1896
2

no no Silver risk no Gorton(1987)
identifies a banking
panic but Sprague and
Friedman and
Schwartz (1963) do
not. Silver risk induced
run on U.S. Treasury
gold reserves
stemmed by Belmont
Morgan
Syndicate(Friedman
and Schwartz)
7 J une 1899 no no no no no Minor recession
8 September
1902
no October
1903
no no no Minor recession. Rich
man's panic
(Friedman and
Schwartz p.151)
28

NBER
Business
Cycle Peak

Banking
Crises

Stock
Market
Crash

Real
Estate
Bust

Tight
Monetary
Policy

Credit
Crunch

Comments

9 May 1907 October
1907
October
1907
no Bank of
England
tightens
yes
1
Major recession and
banking panic, rescue
by J PMorgan,
suspension of
convertibility.
Contemporaries
discuss credit
squeeze.
10 J anuary
1910
no no no no no Minor recession
11 J anuary
1913
August
1914
(incipient)
August
1914
(incipient)
no no no Outbreak of World
War I
12 August 1918 no Fall 1917 no no no Mild recession,
Mishkin and
White(2002) attribute
stock market crisis to
rising interest rates
and controls on new
issues.
13 J anuary
1920
no Fall 1920 no yes no Major recession
induced by Fed tight
money to roll back
wartime inflation.
14 May 1923 no no no yes no Minor recession. Fed
followed policy of
moderate
restraint(Friedman
and Schwartz 1963.
p.287) to offset
incipient inflation.
15 October
1926
no no no
3
yes no Minor recession. Fed
takes "moderate
restraining
measures"(Friedman
and Schwartz 1963.
p.288)
16 August 1929 October
1930 April
1931
Sept/Oct
1931
J an/Feb
1933
October
1929
yes
4
yes yes
5
Great contraction.
Tight Fed policy 1928-
29 to stem stock
market speculation for
Banking crises.
Contraction in net
worth, debt deflation,
bank capital crunch.
17 May 1937 no February
1937 May
1940
no yes yes
6
Major recession. Fed
doubles reserve
requirements in 1936,
Contraction in net
worth, bank capital
crunch.
18 February
1945
no September
1946
no no no End of World War II.
Sharp decreases in
government
expenditures.
Adjustment from war
to peace.
29

NBER
Business
Cycle Peak

Banking
Crises

Stock
Market
Crash

Real
Estate
Bust

Tight
Monetary
Policy

Credit
Crunch

Comments

19 November
1948
no no no yes
7
no Fed tightens to offset
post war inflation.
20 J uly 1953 no no no yes yes
8
Mild recession.
Moderate tightening
reflecting Fed concern
of inflation. Bond crisis
raises rates.
21 August 1957 no no no yes
9
yes
10
Significant recession
induced by Fed
tightening. Evidence
of credit rationing.
22 April 1960 no Spring
1902
11

no yes yes
12
Mild recession
induced by Fed
tightening.
Disintermediation as
market rates pierced
Regulation Q. ceilings
leads to reduced bank
lending.
August
- Sept
1966
13

"Credit crunch" of
1966 background of
Fed tightening
monetary policy end of
1965. Fed bank
regulators urged
restraint on bank
lending.
Disintermediation
Regulation Q. ceilings
bound.
23 December
1969
no
14
May 1970 no yes
15
yes
16
Mild recession. Fed
tightening and
jawboning by Fed and
government to restrain
lending.
Disintermediation as
market rates exceed
Regulation Q. ceilings.
24 November
1973
no
17
November
1973
18

no yes yes
19
Fed tightening. OPEC
shock. Significant
recession. Arthur
Burns May 1974 urges
banks to allocate
credit through non
price rationing.
30

NBER
Business
Cycle Peak

Banking
Crises

Stock
Market
Crash

Real
Estate
Bust

Tight
Monetary
Policy

Credit
Crunch

Comments

25 J anuary
1980
no no
20
no
21
yes yes
22
Significant Fed
tightening begins
October 1979 (Volcker
shock). March 1980
Fed at Carter's
administration request
imposes selective
consumer credit
controls. Controls
lifted J uly 1980.
26 J uly 1981 no
23
no no yes no
24
Tight Fed policy
induces serious
recession.
27 J uly 1990 no August
1990
no
25
yes
26
yes
27
Fed tightening. Gulf
war. Mild recession.
Evidence of non price
credit rationing and a
capital crunch.
28 March 2001 no Spring
2001
no yes no Fed restraint leads to
mild recession, tech
bust
29 December
2007
September October
28
yes
29
yes
30
yes Fed tightening
beginning in J une
2004 may have
helped trigger a real
estate bust, Lehman
Brothers failure, credit
crunch, stock market
slide, and severe
recession.
Endnotes
1
Calomiris and Hubbard(1989) Citing Sprague and others.
2
Gorton(1987).
3
Florida land bust, White(2008).
4
White(2008).

5
Bernanke(1983), Calomiris and Mason(2003), Calomiris and Wilson(2004).
6
Bernanke(1983), Calomiris and Wilson(2004).
7
Romer and Romer(1989) pick October 1947 as the start of Fed tightening.
8
Wojnilower(1992) states that bank lending was impaired by the collapse in Treasury bond
prices.
9
Romer and Romer(1989) date tightening as beginning September 1955.
10
Wojnilower(1980, 1982, 1992), Eckstein and Sinai(1985) discuss credit rationing as leading to
the 1957-58 recession.
31

11
Real stock prices decline by 29% J anuary 1966 to October 1966(Bordo, Dueker and Wheelock
2008).
12
According to Wojnilower(1980, 1992), Fed tightening pushed T-bill rates above the Regulation
Q ceiling leading to disintermediation.
13
Wojnilower(1980), Owens and Schreft(1993).
14
Penn Central collapse in J uly 1970. The Fed averted a crisis by backstopping the money center
banks' support of the commercial paper market.

15
Romer and Romer(1989) date Fed tightening as beginning in December 1968.
16
Owens and Schreft(1993).
17
Failures of Franklin National Bank October 1974 and Germany's Herstatt Bank J une 1974.
18
Romer and Romer(1989) date monetary tightening as beginning in April 1974.
19
Owens and Schreft(1993).
20
Real stock prices decline by 20%, November 1980 to J uly 1982(Bordo, Dueker and Wheelock
2008).
21
Shiller(2005) figure 2.1 shows a 13% decline in real house prices 1979-1993.
22
Owens and Schreft(1993).

23
Failures of Continental Illinois and Penn Square banks in 1984. Also Savings and Loan crisis in
1984.
24
Owens and Schreft(1993).
25
Shiller(2005) figure 2.1 shows a 13% decline in real house prices 1989-1993.
26
Romer and Romer(1989) give December 1988 as the beginning of tight policy.
27
Bernanke and Lown(1991) provide evidence of a capital crunch in New England. Bonds
reduced lending to replenish their capital to meet regulatory standard. Owens and
Schreft(1993) document non price credit rationing in the real estate sector.


28
The Standard and Poor stock price index declined 55%. J uly 2007 to March 2009.
29
The Case and Shiller real home price index declined 33% from December 2006 to October
2008.

30
The Federal Funds rate increased from a trough in May 2004 at 1.00% to a peak of 5.26% in
J uly 2007.

Sources

Banking Crises: Bordo(1986), Friedman and Schwartz(1963), Gorton(1987).

Stock Market Crashes: Bordo(1985), Bordo, Dueker and Wheelock(2008), Friedman and
Schwartz(1963), Mishkin and White(2002), Sprague(1910)

Real Estate Busts: Shiller(2005), White(2008).

Tight Monetary Policy: Friedman and Schwartz(1963), Meltzer(2004), Romer and Romer(1989).

Credit Crunch: Bernanke(1985), Bernanke and Lown(1991), Calomiris and Hubbard(1987),
Calomiris and Mason(2003), Calomiris and Wilson(2004), Eckstein and Sinai(1985), Owens and
Schreft(1993), Wojnilower(1980, 1985, 1992).

32


Amplitude Peak-
Trough
P-T % Trough-peak T-P %
RGNP (NBER
cycles)
-11.13 -7.8% 36.37 34.1%
Rail Road Spread -0.28 0.27
CP -2.63 2.51
M2 growth 10.4% 12.1%
Table 2: Cycle Amplitudes, 1875:1-1918:4, quarterly





Duration (Quarters) 19
th
Peak-Trough Trough-peak
RGNP (NBER cycles) mean 6
max 13
min 3
8.3
12
5
Rail Road Spread mean 8.25
max 18
min 2
9.89
36
2
CP mean 5.54
max 11
min 3
6.75
14
3
M2 growth mean 7.45
max 18
min 4
6.91
12
3
Table 3 Cycle durations, 1875:1-1918:4, quarterly

33


Amplitude Peak-Trough P-T % Trough-peak T-P %
RGNP (NBER
cycles)
-28.69 -5.9% 238.52 29.0%
Baa Spread -1.18 1.14
Discount Rate -2.18 2.18
M2 growth -2.9% 3.1%
Table 4: Cycle Amplitudes, 1920:1 to 2007:4


Duration
20
th


Peak-Trough Trough-peak
RGNP
(NBER
cycles)
mean 4.5
max 14
min 2
17.7
40
4
Baa Spread mean 11.1
max 30
min 4
8.4
21
2
Discount
Rate
mean 8.8125
max 18
min 2
20.8
66
9
M2 growth mean 11
max 65
min 3
6
15
2
Table 5: Cycle Durations, 1920:1 to 2007:4

34


Baa Discount M2 (log dif) NBER
Baa Spread
concordance
Expected concordance
Prob. Of independence

1

54.0%
48.8%
26%

40.3
50.5
0.5%

34.4%
45.5%
0.005%
Discount Rate 1 38.1
49.5
0.4%
61.6
54.6
0.9%
M2 (log difference) 1 50.3
48.0
35.4%
NBER cycle 1
Table 6: Concordances, expected concordances, and probability of independence
(regression method) for 20
th
century series: 1920:1 to 2007:4, quarterly, M2 is annual log
difference, using data from 1919:1 calculated from Balke-Gordon, spliced with Board of
Governors M2 data.
Moody's Seasoned Baa Corporate Bond Yield (% p.a.) less Long-Term Treasury
Composite, Over 10 Years (% p.a.)
Discount Rate: Pre 1945, FRB NY rate, then BOG rate.



NBER Rail spread CP rate M2 (log dif)
NBER Cycle
concordance
Expected concordance
Prob. Of independence

1

59.7%
50.1%
8.1%

63.6
51.0
1.3%

50.6%
49.8%
80.9%
Railroad Spread 1 54.0
50.1
37.9%
50.0
50.0
84.3 %
Commercial Paper
rate
1 39.2
49.7
6.4%
M2 (log difference) 1
Real GNP 67.0
54.1%
0.000%
Table 7: same as above, for 19
th
century data, 1875:1 to 1918:4 (quarterly).



35

Table 8 NBER 19 Recession Amplitude, 19
th
Century.
Recession amplitude (Peak-trough Real GNP as a fraction of Peak RGNP) for NBER
contractions, regressed against the Peak-Trough change in other variables. Money supply and
Stock index are also measured as fractional changes.
Dependent Variable: RNGP
Data is for the NBER recessions starting in 1882,1887,1890, 1893,1895,1899,1902,1907,1910,
and 1913.
With Heteroscedasticity-Consistent (Eicker-White) Standard Errors
(t-statistics in parentheses)

Independent
Variables
1 2 3 4
Constant
0.404**
(2.39)
0.002
(0.08)
-0.032
(-1.54)
0.041**
(2.53)
RR Spread
-0.282**
(2.43)
-0.485*
(-1.91)
-0.032
(-0.33)
-0.291*
(-1.78)
Commercial Paper
0.679***
(5.31)

0.684***
(5.33)
Stock Index
0.237**
(2.19)
0.319**
(2.38)
0.636***
(5.63)
0.233**
(2.10)
M2 growth
0.008
(0.37)
0.025**
(2.54)

Interaction 1
-0.548***
(-6.94)

Interaction 2
-0.174
(-0.10)
Observations 10 10 10 10
R
2
0.814 0.407 0.732 0.814
R-bar
2
0.720 0.111 0.518 0.665
* 10% significance level
** 5% significance level
*** 1% significance level


36

TABLE 9 NBER 20 Recession Amplitude, 20
th
century.
Recession amplitude (Peak-trough Real GNP as a fraction of Peak RGNP) for NBER
contractions, regressed against the Peak-Trough change in other variables. Money supply and
Stock index are also measured as fractional changes.
Dependent Variable: RNGP
Data is for the NBER recessions starting in 1920, 1923,1926,1929, 1937, 1945, 1948, 1953,
1957, 1960, 1969, 1973, 1980, 1981, 1990, 2001.
Dependent Variable: RNGP
With Heteroscedasticity-Consistent (Eicker-White) Standard Errors
(t-statistics in parentheses)

Independent
Variables
1 2 3 4
Constant
0.048**
(2.48)
0.061***
(4.49)
0.039***
(2.82)
0.072***
(2.67)
Baa Spread
-0.010
(-0.48)
-0.025***
(-3.12)
-0.014
(-1.08)
0.031
(0.94)
Discount Rate
-0.004
(-0.35)

-0.039***
(-2.93)
Stock Index
0.218**
(2.27)
-0.045
(-0.85)
0.014
(0.22)
0.168**
(2.45)
M2 growth
0.765***
(7.45)
-0.024
(-0.05)

Interaction 1
-0.341*
(-1.76)

Interaction 2
-0.041***
(-3.54)
Observations 16 16 16 16
R
2
0.506 0.743 0.834 0.763
R-bar
2
0.383 0.679 0.774 0.677
* 10% significance level
** 5% significance level
*** 1% significance level


37

TABLE 10: PAGAN 19 Recession Amplitude associated with cycles in other variables.
This shows the results of regression of RGNP percent amplitude in an NBER contraction (P-T)
against the change other variables over their individual Harding-Pagan cycle.
Dependent Variable: RNGP
For the recessions of the 19
th
century.
With Heteroscedasticity-Consistent (Eicker-White) Standard Errors
(t-statistics in parentheses)

Independent
Variables
1 2 3 4
Constant
-0.128***
(-4.65)
-0.095***
(-3.54)
-0.114***
(-3.54)
-0.232***
(-4.74)
RR Spread
-0.003
(-0.08)
-0.058
(-1.43)
-0.109**
(-2.37)
-0.471***
(-3.61)
Commercial Paper
0.029***
(3.81)

0.058***
(6.71)
Stock Index
0.384***
(2.75)
0.509***
(4.91)
0.616***
(4.44)
0.552***
(4.42)
M2 growth
-0.206***
(-3.65)
-0.038
(-0.22)

Interaction 1
-0.539
(-1.18)

Interaction 2
0.196***
(4.07)
Observations 10 10 10 10
R
2
0.609 0.578 0.632 0.806
R-bar
2
0.414 0.367 0.339 0.651
* 10% significance level
** 5% significance level
*** 1% significance level


38

Table 11: PAGAN 20 Recession Amplitude associated with cycles in other variables.
This shows the results of regression of RGNP percent amplitude in an NBER contraction (P-T)
against the change other variables over their individual Harding-Pagan cycle.

Dependent Variable: RNGP
With Heteroscedasticity-Consistent (Eicker-White) Standard Errors
(t-statistics in parentheses)

Independent
Variables
1 2 3 4
Constant
0.075**
(2.37)
0.064***
(2.86)
0.038**
(2.27)
0.033
(0.82)
Baa Spread
0.019
(0.83)
0.012
(0.68)
0.024***
(3.63)
0.039
(1.38)
Discount Rate
-0.012**
(-2.01)

0.020
(1.19)
Stock Index
0.014**
(2.40)
0.006**
(2.18)
0.003*
(1.64)
-0.002
(-0.23)
M2 growth
0.083
(0.41)
0.071
(0.97)

Interaction 1
0.138***
(13.34)

Interaction 2
-0.015
(-1.63)
Observations 15 15 15 15
R
2
0.293 0.167 0.858 0.400
R-bar
2
0.100 -0.060 0.801 0.160
* 10% significance level
** 5% significance level
*** 1% significance level



39

Table 12 Recession Amplitudes with and without large financial events.
P-T RGNP
Amplitude, 20
th

credit M2 Stock
With crunch 10.4% 14.8% 15.2%
Without crunch 3.8% 2.9% 2.8%
t-statistic 0.98 1.57 1.34

P-T RGNP
Amplitude, 19
th

credit M2 Stock
With crunch 7.1% 6.9% 5.4%
Without crunch 0.1% -0.7% 0.8%
t-statistic 1.83** 3.12** 0.94
t-tests for equal mean with unequal variances.
*significant at 10% level
**significant at 5% level
***significant at 1% level


40

41



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