Òscar Jordà is Professor of Economics at the University of California Davis. He obtained his Ph.D. in Economics at the University of California, San Diego. He is an Associate Editor for the Journal of Business and Economic Statistics, Empirical Economics, and the Journal of Econometric Methods. He has consulted for the European Central Bank and the Bank of Korea, and has been a visiting scholar for the Federal Reserve Board and the Banco de Chile. He is currently a visiting scholar with the Federal Reserve Bank of San Francisco. His research spans monetary and international economics, time series methods for macroeconomics, and forecasting. Recent contributions have appeared in American Economic Review, International Economic Review, Journal of Political Economy, Review of Economics and Statistics and several other journals.
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This paper studies the role of credit in the business cycle, with a focus on private credit overhang.
Two separate narratives have emerged in the wake of the Global Financial Crisis. One interpretation speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways.
In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that excessive private-sector borrowing plays a greater role than fiscal profligacy in generating financial instability. However, when the credit boom collapses, the government’s capacity to alleviate the downturn is limited by the prevailing level of public debt.