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Can financial innovation help to explain the reduced volatility of economic activity?

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  • Karen E. Dynan
  • Douglas W. Elmendorf
  • Daniel E. Sichel

Abstract

The stabilization of economic activity in the mid 1980s has received considerable attention. Research has focused primarily on the role played by milder economic shocks, improved inventory management, and better monetary policy. This paper explores another potential explanation: financial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and firms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of simple empirical techniques to identify links between the observed moderation in economic activity and the influence of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2005-54.

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Date of creation: 2005
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Handle: RePEc:fip:fedgfe:2005-54

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Keywords: Economic stabilization ; Financial engineering ; Financial modernization;

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References

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  1. 'A Century of U.S. Central Banking: Goals, Frameworks, Accountability'
    by Mark Thoma in Economist's View on 2013-07-10 13:48:26
  2. Et si la Grande Modération ne s’était jamais achevée ?
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