Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Role of Credit in Great Moderation: a Multivariate GARCH Approach

Contents:

Author Info

  • Grydaki, Maria
  • Bezemer, Dirk J.

Abstract

During the Great Moderation, financial innovation in the U.S. increased the size and scope of credit flows supporting the growth of wealth. We hypothesize that spending out of wealth came to finance a wider range of GDP components such that it smoothed GDP. Both these trends combined would be consistent with a decrease in the volatility of output. We suggest testable implications in terms of both growth of credit and output and volatility of growth. In a multivariate GARCH framework, we test this view for home mortgages and residential investment. We observe unidirectional causality in variance from total output, residential investment and non-residential output to mortgage lending before, but not during the Great Moderation. These findings are consistent with a role for credit dynamics in explaining the Great Moderation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://mpra.ub.uni-muenchen.de/39813/
File Function: original version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39813.

as in new window
Length:
Date of creation: 28 Jun 2012
Date of revision:
Handle: RePEc:pra:mprapa:39813

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: great moderation; mortgage credit; multivariate GARCH; causality;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Guerron-Quintana, Pablo A., 2009. "Money demand heterogeneity and the great moderation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(2), pages 255-266, March.
  2. JONATHAN McCARTHY & EGON ZAKRAJSEK, 2007. "Inventory Dynamics and Business Cycles: What Has Changed?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(2-3), pages 591-613, 03.
  3. Christian M. HAFNER & Helmut HERWARTZ, 2008. "Testing for Causality in Variance Usinf Multivariate GARCH Models," Annales d'Economie et de Statistique, ENSAE, issue 89, pages 215-241.
  4. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1426, C.E.P.R. Discussion Papers.
  5. Urban Jermann & Vincenzo Quadrini, 2006. "Financial innovations and macroeconomic volatility," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Nov.
  6. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 183-202.
  7. Angelos Kanas, 2002. "Mean and Variance Causality between Official and Parallel Currency Markets: Evidence from Four Latin American Countries," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 37(2), pages 137-163, 05.
  8. Caporale, Guglielmo Maria & Howells, Peter, 2001. "Money, Credit and Spending: Drawing Causal Inferences," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 48(5), pages 547-57, November.
  9. Alessandra Fogli & Fabrizio Perri, 2006. "The "Great Moderation" and the US External Imbalance," Working Papers, Laboratory for Macroeconomic Analysis CAS_RN_2007_5, Laboratory for Macroeconomic Analysis.
  10. Laurent, Sebastien & Peters, Jean-Philippe, 2002. " G@RCH 2.2: An Ox Package for Estimating and Forecasting Various ARCH Models," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 447-85, July.
  11. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  12. Michael T. Owyang & Jeremy Piger & Howard J. Wall & Federal Reserve Bank of St. Louis, 2006. "A State-Level Analysis of the Great Moderation," Computing in Economics and Finance 2006, Society for Computational Economics 131, Society for Computational Economics.
  13. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-15, C.V. Starr Center for Applied Economics, New York University.
  14. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(4), pages 155-80, Fall.
  15. V. Alaganar & Ramaprasad Bhar, 2003. "An international study of causality-in-variance: Interest rate and financial sector returns," Journal of Economics and Finance, Springer, Springer, vol. 27(1), pages 39-55, March.
  16. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2005. "Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects," Cardiff Economics Working Papers E2005/13, Cardiff University, Cardiff Business School, Economics Section.
  17. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  18. Wen-Shwo Fang & Stephen M. Miller, 2008. "The Great Moderation and The Relationship between Output Growth and Its Volatility," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 819-838, January.
  19. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  20. Cheung, Yin-Wong & Ng, Lilian K., 1996. "A causality-in-variance test and its application to financial market prices," Journal of Econometrics, Elsevier, Elsevier, vol. 72(1-2), pages 33-48.
  21. David M. Kemme & Saktinil Roy, 2012. "Did the Recent Housing Boom Signal the Global Financial Crisis?," Southern Economic Journal, Southern Economic Association, vol. 78(3), pages 999-1018, January.
  22. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2005. "Can financial innovation help to explain the reduced volatility of economic activity?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2005-54, Board of Governors of the Federal Reserve System (U.S.).
  23. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Explaining The Great Moderation: It Is Not The Shocks," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(2-3), pages 621-633, 04-05.
  24. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(1), pages 49-123, January.
  25. Margaret M. McConnell & Gabriel Perez Quiros, 1997. "Output fluctuations in the United States: what has changed since the early 1980s?," Research Paper, Federal Reserve Bank of New York 9735, Federal Reserve Bank of New York.
  26. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  27. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Assessing the Sources of Changes in the Volatility of Real Growth," NBER Working Papers 11946, National Bureau of Economic Research, Inc.
  28. Hong, Yongmiao, 2001. "A test for volatility spillover with application to exchange rates," Journal of Econometrics, Elsevier, Elsevier, vol. 103(1-2), pages 183-224, July.
  29. Borja Larrain, 2006. "Do Banks Affect the Level and Composition of Industrial Volatility?," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1897-1925, 08.
  30. Jeffrey R. Campbell & Zvi Hercowitz, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," NBER Working Papers 11330, National Bureau of Economic Research, Inc.
  31. Caporale, Guglielmo Maria & Pittis, Nikitas & Spagnolo, Nicola, 2002. "Testing for Causality-in-Variance: An Application to the East Asian Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(3), pages 235-45, July.
  32. James D. Hamilton, 2008. "Macroeconomics and ARCH," NBER Working Papers 14151, National Bureau of Economic Research, Inc.
  33. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper, Federal Reserve Bank of Atlanta 2004-14, Federal Reserve Bank of Atlanta.
  34. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(2), pages 273-285, November.
  35. Charles Bean, 2010. "Joseph Schumpeter Lecture The Great Moderation, The Great Panic, and The Great Contraction," Journal of the European Economic Association, MIT Press, MIT Press, vol. 8(2-3), pages 289-325, 04-05.
  36. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  37. Guangzhong Li & James Refalo & Lifan Wu, 2008. "Causality-in-variance and causality-in-mean among European government bond markets," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(21), pages 1709-1720.
  38. Pantelidis, Theologos & Pittis, Nikitas, 2004. "Testing for Granger causality in variance in the presence of causality in mean," Economics Letters, Elsevier, Elsevier, vol. 85(2), pages 201-207, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Bezemer, Dirk & Grydaki, Maria, 2013. "Debt and the U.S. Great Moderation," MPRA Paper 47399, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:39813. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.