Volatility Cycles of Output and Inflation: A Good Shock, Bad Shock Story
We 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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- Szilárd Benk & Max Gillman & Michal Kejak, 2005.
"Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 668-687, July.
- 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.
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