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Did Credit Decouple from Output in the Great Moderation?

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  • Grydaki, Maria
  • Bezemer, Dirk

Abstract

The U.S. during the 1984-2007 Great Moderation saw unusual macroeconomic stability combined with strong growth in asset prices and in credit relative to output. The distribution of credit shifted towards the financial and real estate sectors. The literature shows that each of these trends increases financial fragility, suggesting that the Great Moderation stability was destabilizing. We explore this interpretation by testing the Allen and Gale (2000) bubble feature that credit growth was driven more by past credit growth and less by output growth. We test this distinguishing between credit to asset markets and credit to the nonfinancial sectors. Results from a VAR model estimated on quarterly data for 1955-2007 suggest that the causal relations of credit aggregates and output differed before the Great Moderation and during the Great Moderation, along the lines we hypothesize. This invites a reinterpretation of the Great Moderation, and may help understand when a credit boom turns into a credit bubble.

Suggested Citation

  • Grydaki, Maria & Bezemer, Dirk, 2013. "Did Credit Decouple from Output in the Great Moderation?," MPRA Paper 47424, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47424
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    More about this item

    Keywords

    great moderation; credit; output; VAR; financial fragility;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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