Abstract
This paper is aimed to investigate the role of credit in business cycles, with a focus on private credit overhang in the expansion. There are two major findings from Jordà et al. (2013): first, financial recessions are more serious than normal recessions in terms of the magnitude of the output decrease; and second, for both types of recession, more credit expansion during the expansion stage of business cycles tend to be followed by deeper recessions and slower recoveries. Following Jordà et al. (2013), we employ the data from the Asia-Pacific and less-development countries between 1960 and 2012 to examine the magnitude of the output decrease between financial and normal recessions and how the credit growth in the expansion stage works. We find that the financial recession causes economic output dropped more than the normal recession and a credit-intensive expansion tend to be followed by a deeper recession. Besides, from the quantitative model, we test the effect of the credit on the output in recession depends on the threshold value. The result is the drop of output in the recession is deeper at the high credit expansion, but it is not statistically significant. Eventually, we can conclude with that an important factor in determining the output falling level is whether it is financial recession or not in our study.