The role of credit in the Great Moderation: A multivariate GARCH approach

Maria Grydaki*, Dirk Bezemer

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

11 Citations (Scopus)

Abstract

During the Great Moderation, financial innovation in the US increased the size and scope of credit flows supporting the growth of wealth. We hypothesize that spending out of wealth came to finance a wider range of GDP components such that it smoothed GDP. Both these trends combined would be consistent with a decrease in the volatility of output. We suggest testable implications in terms of both growth of credit and output and volatility of growth. In a multivariate GARCH framework, we test this view for home mortgages and residential investment. We observe unidirectional causality in variance from total output, residential investment and non-residential output to mortgage lending before, but not during the Great Moderation. These findings are consistent with a role for credit dynamics in explaining the Great Moderation. (C) 2013 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)4615-4626
Number of pages12
JournalJournal of Banking & Finance
Volume37
Issue number11
DOIs
Publication statusPublished - Nov-2013
EventINFINITI Conference on International Financial Integration - , Ireland
Duration: 1-Jun-2012 → …

Keywords

  • Great Moderation
  • Mortgage credit
  • Multivariate GARCH
  • Causality
  • AUTOREGRESSIVE CONDITIONAL HETEROSCEDASTICITY
  • CAUSALITY-IN-VARIANCE
  • MONETARY-POLICY
  • TIME-SERIES
  • UNIT-ROOT
  • ECONOMIC-ACTIVITY
  • GENERALIZED ARCH
  • FINANCIAL CRISIS
  • BUSINESS-CYCLE
  • EXCHANGE-RATES

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