Nonfinancial sector debt and the U.S. Great Moderation: Evidence from flow‐of‐funds data

Maria Grydaki, Dirk Bezemer

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

In the mid‐1980s, two shifts occurred in the US economy: the strong decline of macroeconomic volatility and the strong increase of borrowing by the nonfinancial sector above the level of output growth until 2007. Since access to credit may decrease output fluctuations, we hypothesize that during the Great Moderation borrowing by the nonfinancial sector in excess of gross domestic product (GDP) growth moderated GDP fluctuations. We estimate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models over 1954–2008 to measure output growth volatility and run Vector Autoregressive (VAR) models and a counterfactual simulation in order to analyse the relation of credit growth in excess of output growth and output growth volatility.
Original languageEnglish
Pages (from-to)80-96
Number of pages17
JournalInternational Journal of Finance and Economics
Volume24
Issue number1
Early online date30-Jul-2018
DOIs
Publication statusPublished - Jan-2019

Keywords

  • causality
  • credit
  • Great Moderation
  • VAR
  • MONETARY-POLICY
  • TIME-SERIES
  • BUSINESS-CYCLE
  • UNIT-ROOT
  • CREDIT
  • VOLATILITY
  • OUTPUT
  • INFLATION
  • MODELS
  • GROWTH

Cite this