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Explaining the Great Moderation: Credit in the Macroeconomy Revisited

  • Bezemer, Dirk J

This study in recent history connects macroeconomic performance to financial policies in order to explain the decline in volatility of economic growth in the US since the mid-1980s, which is also known as the ‘Great Moderation’. Existing explanations attribute this to a combination of good policies, good environment, and good luck. This paper hypothesizes that before and during the Great Moderation, changes in the structure and regulation of US financial markets caused a redirection of credit flows, increasing the share of mortgage credit in total credit flows and facilitating the smoothing of volatility in GDP via equity withdrawal and a wealth effect on consumption. Institutional and econometric analysis is employed to assess these hypotheses. This yields substantial corroboration, lending support to a novel ‘policy’ explanation of the Moderation.

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File URL: http://mpra.ub.uni-muenchen.de/15893/1/MPRA_paper_15893.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15893.

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Date of creation: May 2009
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Handle: RePEc:pra:mprapa:15893
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