This paper explores the effects of changes in lending standards on racial segregation within metropolitan areas. Such changes affect neighborhood choices as well as aggregate prices and quantities in the housing market. Using the credit boom of 2000 to 2006 as a large-scale experiment, we put forward an IV strategy that predicts the relaxation of credit standards as the result of a credit supply shock predominantly affecting liquidity-constrained banks. The relaxed lending standards led to significant outflows of whites from black and racially mixed neighborhoods. Without such a credit supply shock, black households would have had between 2.3 and 5.1 percentage points more white neighbors in 2010.

Countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. Because financial crises are realizations of downside risk, we measure their incidence by the skewness of credit growth. Unlike variance, negative skewness isolates the impact of the large, infrequent, and abrupt credit busts associated with crises. We find a robust negative link between skewness and GDP growth in a large sample of countries over 1960–2000. This suggests a positive effect of systemic risk on growth. To explain this finding, we present a model in which contract enforceability problems generate borrowing constraints and impede growth. In financially liberalized economies with moderate contract enforceability, systemic risk taking is encouraged and increases investment. This leads to higher mean growth but also to greater incidence of crises. In the data, the link between skewness and growth is indeed strongest in such economies.

We present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises. Our empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis. We also discuss several models of financial liberalization and growth whose predictions are consistent with our empirical findings.

The paper studies how high household leverage and crises can be caused by changes in the income distribution. Empirically, the periods 1920–1929 and 1983–2008 both exhibited a large increase in the income share of high-income households, a large increase in debt leverage of low- and middle-income households, and an eventual financial and real crisis. The paper presents a theoretical model where higher leverage and crises are the endogenous result of a growing income share of high-income households. The model matches the profiles of the income distribution, the debt-to-income ratio and crisis risk for the three decades preceding the Great Recession.