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Explaining the Great Moderation: Credit in the Macroeconomy Revisited

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  • Bezemer, Dirk J

Abstract

This study in recent history connects macroeconomic performance to financial policies in order to explain the decline in volatility of economic growth in the US since the mid-1980s, which is also known as the ‘Great Moderation’. Existing explanations attribute this to a combination of good policies, good environment, and good luck. This paper hypothesizes that before and during the Great Moderation, changes in the structure and regulation of US financial markets caused a redirection of credit flows, increasing the share of mortgage credit in total credit flows and facilitating the smoothing of volatility in GDP via equity withdrawal and a wealth effect on consumption. Institutional and econometric analysis is employed to assess these hypotheses. This yields substantial corroboration, lending support to a novel ‘policy’ explanation of the Moderation.

Suggested Citation

  • Bezemer, Dirk J, 2009. "Explaining the Great Moderation: Credit in the Macroeconomy Revisited," MPRA Paper 15893, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15893
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    Cited by:

    1. Herwartz, Helmut & Maxand, Simone & Rohloff, Hannes, 2018. "Lean against the wind or float with the storm? Revisiting the monetary policy asset price nexus by means of a novel statistical identification approach," University of Göttingen Working Papers in Economics 354, University of Goettingen, Department of Economics.
    2. Jambu, Marc-Antoine, 2010. "Has the Globalisation really generated more competition in OECD economies," MPRA Paper 19974, University Library of Munich, Germany.

    More about this item

    Keywords

    real estate; macro volatility;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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