Lesson 3 of 7 · All lessons in this module
- What a business cycle is: classical, growth and growth rate cycles
- The four phases, recessions and market behaviourVideo lesson
- Credit cycles
- Labour, capital spending, inventories, consumers and housing
- Leading, coincident and lagging indicatorsVideo lesson
- Surveys, big data, nowcasting and diffusion indexes
- Integrated cases: reading the cycle from a data panel
Lesson 3 of 7 · 11 min
Credit cycles
Credit cycles are the swings in how easily and how cheaply the private sector can borrow; they feed into property and investment, amplify business cycles, last longer than them and, at strong peaks, often precede banking crises.
In short
- Credit cycles describe changes in the availability and pricing of credit to the private sector, often tracked with credit growth, the credit-to-GDP ratio and house prices.
- When the economy is strong, lenders lend more on easier terms; when it weakens they tighten, making credit scarcer and dearer.
- Credit matters most for construction and property purchases, so tight credit hits real estate values, which deepens the downturn.
- With financial frictions, credit amplifies cycles: recessions with financial busts are longer and deeper; recoveries with fast credit growth are stronger.
- Credit cycles are longer, deeper and sharper than business cycles and not always synchronised with them.
- Strong credit peaks are closely linked to later systemic banking crises, which is why macroprudential policy aims to dampen financial booms.
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