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The role of credit in the Great Moderation: A multivariate GARCH approach

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  • Grydaki, Maria
  • Bezemer, Dirk

Abstract

During the Great Moderation, financial innovation in the US 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.

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  • Grydaki, Maria & Bezemer, Dirk, 2013. "The role of credit in the Great Moderation: A multivariate GARCH approach," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4615-4626.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4615-4626
    DOI: 10.1016/j.jbankfin.2013.01.039
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    Cited by:

    1. repec:dgr:rugsom:14030-gem is not listed on IDEAS
    2. Bezemer, Dirk & Grydaki, Maria, 2014. "Nonfinancial sectors debt and the U.S. great moderation," Research Report 14030-GEM, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    3. repec:eee:joecas:v:14:y:2016:i:pa:p:78-92 is not listed on IDEAS
    4. repec:eee:ecmode:v:68:y:2018:i:c:p:51-73 is not listed on IDEAS
    5. Zhang, Lu & Bezemer, Dirk, 2015. "A global house of debt effect? Mortgages and post-crisis recessions in fifty economies," Research Report 15009-GEM, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    6. Dirk Bezemer, 2014. "Schumpeter might be right again: the functional differentiation of credit," Journal of Evolutionary Economics, Springer, vol. 24(5), pages 935-950, November.
    7. Clavero, Borja, 2017. "A contribution to the Quantity Theory of Disaggregated Credit," MPRA Paper 76657, University Library of Munich, Germany.
    8. Bezemer, Dirk & Grydaki, Maria, 2014. "Financial fragility in the Great Moderation," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 169-177.

    More about this item

    Keywords

    Great Moderation; Mortgage credit; Multivariate GARCH; Causality;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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