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.
|Date of creation:||2008|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-1171, December.
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