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Atypical Behavior of Money and Credit: Evidence From Conditional Forecasts

  • Afanasyeva, Elena
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    Great Recession 2007-2008 has revived interest to quantity aggregates (money and credit) and their role as indicators of financial instability for monetary and macroprudential policy. However, many of the previous empirical studies inspecting indicator properties used univariate methods and did not explicitly account for endogenous interactions of variables. We use a multivariate approach (Bayesian VAR) to detect periods of atypical behavior in money and credit in the US and in Euro Area. We find that atypical behavior of these variables is associated with periods of financial distress and (or) banking crises in the US. Moreover, we detect an unsustained credit boom prior to the Great Recession in both Euro Area and in the US. There is a link between this boom and the short-term interest rates in both regions: conditioning on the short-term interest rates substantially reduces the degree of atypical expansionary behavior of money and credit in 2003-2007.

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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 65405.

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    Date of creation: 2012
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    Handle: RePEc:zbw:vfsc12:65405
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    1. Domenico Giannone & Michele Lenza & Giorgio E. Primiceri, 2015. "Prior Selection for Vector Autoregressions," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 436-451, May.
    2. Daniel F. Waggoner & Tao Zha, 1998. "Conditional forecasts in dynamic multivariate models," FRB Atlanta Working Paper 98-22, Federal Reserve Bank of Atlanta.
    3. Orphanides, Athanasios & Wieland, Volker, 2012. "Complexity and monetary policy," IMFS Working Paper Series 57, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
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    6. Alan M. Taylor, 2013. "The Great Leveraging," World Scientific Book Chapters, in: The Social Value of the Financial Sector Too Big to Fail or Just Too Big?, chapter 4, pages 33-65 World Scientific Publishing Co. Pte. Ltd..
    7. Burcu Aydin & Engin Volkan, 2011. "Incorporating Financial Stability in Inflation Targeting Frameworks," IMF Working Papers 11/224, International Monetary Fund.
    8. Enrique G. Mendoza & Marco E. Terrones, 2008. "An anatomy of credit booms: evidence from macro aggregates and micro data," International Finance Discussion Papers 936, Board of Governors of the Federal Reserve System (U.S.).
    9. Daisuke Ishikawa & Yoshiro Tsutsui, 2006. "Has the Credit Crunch Occurred in Japan in 1990s?," Discussion papers 06012, Research Institute of Economy, Trade and Industry (RIETI).
    10. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
    11. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    12. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
    13. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2012. "Money, credit, monetary policy and the business cycle in the euro area," CEPR Discussion Papers 8944, C.E.P.R. Discussion Papers.
    14. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
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