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Can Financial Frictions Help Explain the Performance of the U.S. Fed?

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  • de Blas Beatriz

    (Universidad Autónoma de Madrid)

Abstract

This paper analyzes the decreased volatility of U.S. macroeconomic variables starting in the 1980's in a model where monetary policy is affected by financial frictions. The model is estimated for postwar U.S. data with a break in 1981:3, allowing for changes in the policy rule, shock processes and financial frictions across subsamples. There is some evidence that changed monetary policy is more important to explain inflation stabilization, while "good luck" helps explain the increased stability in output. However, the results are most consistent with a decline in shock variances which was reinforced by a decrease in financial frictions, making the economy less vulnerable to shocks.

Suggested Citation

  • de Blas Beatriz, 2009. "Can Financial Frictions Help Explain the Performance of the U.S. Fed?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-30, June.
    • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:27
    DOI: 10.2202/1935-1690.1531
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    Cited by:

    1. Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
    2. Andrea Silvestrini & Andrea Zaghini, 2015. "Financial shocks and the real economy in a nonlinear world: a survey of the theoretical and empirical literature," Questioni di Economia e Finanza (Occasional Papers) 255, Bank of Italy, Economic Research and International Relations Area.
    3. Begona Dominguez & Pedro Gomis-Porqueras, 2019. "The effects of secondary markets for government bonds on inflation dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 249-273, April.
    4. Wouter J. Den Haan & Vincent Sterk, 2011. "The Myth of Financial Innovation and the Great Moderation," Economic Journal, Royal Economic Society, vol. 121(553), pages 707-739, June.
    5. Zaghini, Andrea & Bencivelli, Lorenzo, 2012. "Financial innovation, macroeconomic volatility and the great moderation," MPRA Paper 41263, University Library of Munich, Germany.
    6. Balázs Égert & Douglas Sutherland, 2014. "The Nature of Financial and Real Business Cycles: The Great Moderation and Banking Sector Pro-Cyclicality," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 98-117, February.
    7. Dominguez, Begona & Gomis-Porqueras, Pedro, 2016. "The Effects of Secondary Markets and Unsecured Credit on Inflation Dynamics," MPRA Paper 75096, University Library of Munich, Germany.

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    More about this item

    Keywords

    great moderation; financial frictions; monetary policy rules; limited participation;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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