The Myth of Financial Innovation and the Great Moderation
Financial innovation is widely believed to be at least partly responsible for the recent financial crisis. At the same time, there are empirical and theoretical arguments that support the view that changes in financial markets played a role in the "great moderation". If both are true, then the price of reducing the likelihood of another crisis, e.g., through new regulation, could be giving up another episode of sustained growth and low volatility. However, this paper questions empirical evidence supporting the view that innovation in consumer credit and home mortgages reduced cyclical variations of key economic variables. We find that especially the behaviour of aggregate home mortgages changed less during the great moderation than is typically believed. For example, aggregate home mortgages declined during monetary tightenings, both before and during the great moderation. A remarkable change we do find is that monetary tightenings became episodes during which financial institutions other than banks increased their holdings in mortgages. Once can question the desirability of such strong substitutions of ownership during economic downturns.
|Date of creation:||Oct 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Urban Jermann & Vincenzo Quadrini, 2007.
"Financial Innovations and Macroeconomic Volatility,"
2007 Meeting Papers
50, Society for Economic Dynamics.
- Urban Jermann & Vincenzo Quadrini, 2006. "Financial innovations and macroeconomic volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- Jermann, Urban & Quadrini, Vincenzo, 2006. "Financial Innovations and Macroeconomic Volatility," CEPR Discussion Papers 5727, C.E.P.R. Discussion Papers.
- Urban Jermann & Vincenzo Quadrini, 2006. "Financial Innovations and Macroeconomic Volatility," NBER Working Papers 12308, National Bureau of Economic Research, Inc.
- 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.
- Stephen G Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2005. "Assessing the Sources of Changes in the Volatility of Real Growth," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
- Jonathan McCarthy & Richard W. Peach, 2002. "Monetary policy transmission to residential investment," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 139-158.
- Matteo Iacoviello & Marina Pavan, 2011.
"Housing and debt over the life cycle and over the business cycle,"
International Finance Discussion Papers
1032, Board of Governors of the Federal Reserve System (U.S.).
- Iacoviello, Matteo & Pavan, Marina, 2013. "Housing and debt over the life cycle and over the business cycle," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 221-238.
- Matteo Iacoviello & Marina Pavan, 2011. "Housing and Debt over the Life Cycle and over the Business Cycle," Working Papers 2011/04, Economics Department, Universitat Jaume I, Castellón (Spain).
- Matteo Iacoviello & Marina Pavan, 2009. "Housing and debt over the life cycle and over the business cycle," Working Papers 09-12, Federal Reserve Bank of Boston.
- Matteo Iacoviello & Marina Pavan, 2009. "Housing and Debt Over the Life Cycle and Over the Business Cycle," Boston College Working Papers in Economics 723, Boston College Department of Economics, revised 19 Sep 2011.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7507. 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: ()
If references are entirely missing, you can add them using this form.