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The top economist at the “central bankers’ central bank” on the changing nature of recessions

Gwynn Guilford
Member exclusive by Gwynn Guilford for The next recession

Known as the “central bankers’ central bank,” the Bank for International Settlements (BIS) provides financial services for the world’s central banks and promotes global monetary and financial stability. The Basel-based organization was founded in 1930, making it the oldest global financial institution. It is also one of the most influential—even though its research increasingly challenges the monetary policy orthodoxy that has seen the central banks in the US, Europe, and Japan embrace low interest rates and unprecedentedly huge bond-buying programs in the last decade. Its top economist, Claudio Borio, has long led this research effort. Quartz caught up with Borio recently to discuss what BIS analysis of “financial cycles” suggests about risks of recession and financial instability around the world.

Quartz: Building on your extensive research into financial cycle dynamics, you and your BIS colleagues recently published an analysis that found that a composite of financial cycle proxies [medium-term changes in real credit, a country’s credit-to-GDP ratio, and real home prices] more reliably predict recessions than yield curve inversions. 1 What does your analysis reveal about the current risk of recession? 

Normally, yields on long-term bonds should be higher than those for short-term bonds, since investors face greater uncertainty—and, therefore, risk that they will lose money (e.g. that future inflation will eat away the value of the bond’s interest payments). Inversions—when the yields for longer-term bonds dip below those for short-term bonds—have within two years of nearly all of US recessions since the 1950s.

Claudio Borio: It’s important to underline that at the BIS we do not make or publish forecasts. We look more at the balance of risks around the consensus forecast, which are quite public. This is a second important point: [the financial sector proxies] need to be taken with a spoonful of salt because they’re just one piece of information for a more thorough analysis. And it would be overly ambitious to talk about timing.

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