Gabriel Jiménez, Dmitry Kuvshinov, José-Luis Peydró, Björn Richter
Central banks have been raising interest rates to fight inflation, after a period when rates were first cut and then kept low. This column uses data for 17 developed countries over 150 years to show that policy rate hikes substantially increase crisis risk, if rates were previously cut. Rate cuts lead to booms in credit and asset prices, and subsequent rate increases expose these financial vulnerabilities, potentially triggering a crisis. Spanish administrative data reveal that these effects also hold for defaults at individual loan level, and are much stronger for ex ante riskier firms and banks.