Volatility Cycles of Output and Inflation: A Good Shock, Bad Shock Story
AbstractWe explain the close correlation of volatilities of GDP growth and inflation over the 1919-2004 period, using credit and money shocks that have "bad" and "good" effects that are defined in terms of their effects on the spectral variation in GDP. With these shocks, plus standard TFP productivity shocks, we identify, characterize and contrast the two great volatility cycles over the historical period, within an endogenous growth monetary business cycle with micro-based banking production. The Great Moderation post-1983 coincided with good credit shocks from deregulation, which allowed money velocity to diverge from GDP and inflation volatilities, while the Great Depression was faced with bad money and credit shocks that tied together velocity volatility with GDP and inflation volatility.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 415.
Date of creation: 2008
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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- Scheffel, Eric, 2008. "A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Cardiff Economics Working Papers, Cardiff University, Cardiff Business School, Economics Section E2008/30, Cardiff University, Cardiff Business School, Economics Section.
- Scheffel, Eric, 2008. "Consumption Velocity in a Cash Costly-Credit Model," Cardiff Economics Working Papers, Cardiff University, Cardiff Business School, Economics Section E2008/31, Cardiff University, Cardiff Business School, Economics Section.
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