The Great Leveraging (INET)

Our key objective is to study the interaction between leverage, asset prices, and the macroeconomy. Charles P. Kindleberger’s seminal work Manias, Panics, and Crashes has long been the reference point for the history of asset mispricing and crashes. We will revisit Kindleberger’s original questions about the origins and consequences of credit-fueled asset price booms. Yet we will also apply the full toolbox of state-of-the-art quantitative methods and a wealth of detailed long-run historical macro data to the question. We aim our research at updating economic thinking (theoretical and applied) and at current policy debates.


(1) What are the macroeconomic origins of asset bubbles, and in particular what role does leverage play in driving asset prices and the emergence of bubbles?

(2) How have returns on housing, land, physical capital, financial capital evolved in the long-run and what do we know about the factors driving the return on assets?

(3) What does macroeconomic history have to say about how monetary policy affects asset price bubbles? What tradeoffs do policymakers face when managing financial stability, inflation stability, and growth?

(4) What are the economic costs and benefits of asset price bubbles for the macroeconomy and how are these shaped by the extent and the type of leverage on which they are built?


Collaborators: Òscar Jordà and Alan Taylor