Federal Reserve Research On The Impact Of Credit On The Business Cycle

This article, from the Federal Reserve Bank of San Francisco, explains why the economic models used by central banks were not useful in forecasting the Great Recession. The DSGE models do not include the credit market. The credit market contributed to the Great Recession, and it has had a predictable impact on the recovery. Credit expansion relative to GDP was greatest in those countries that experienced the steepest declines, and they have also experienced the slowest recoveries.