Data and Code for: Feedbacks: Financial Markets and Economic Activity

Is credit expansion a sign of desirable financial deepening or the prelude to an<br>inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly-frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associ-ated. “Financial stress” shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008-9 crisis, but spreads improve within-crisis forecasts.<br><br><br>