Financial fragility in the Great Moderation
Dirk Bezemer and
Maria Grydaki ()
Journal of Banking & Finance, 2014, vol. 49, issue C, 169-177
Abstract:
A nascent literature explores the measurement of financial fragility. This paper considers evidence for rising financial fragility during the 1984–2007 Great Moderation in the U.S. The literature suggests that macroeconomic stability combined with strong growth of credit to asset markets, in asset prices and in credit relative to output are all indicators of rising financial fragility. We show each of these trends in the Great Moderation. We derive the testable implication that in the Great Moderation credit growth is driven more by past credit growth and less by output growth (Allen and Gale, 2000), relative to pre-Great Moderation years. Results from a VAR model estimated on quarterly data for 1955–2007 are consistent with the hypothesis. This invites a reinterpretation of the Great Moderation. Our methodology may help understand when a credit boom turns into a credit bubble, and contributes to the development of methods of measuring financial fragility.
Keywords: Financial fragility; Great Moderation; Credit; Output; VAR (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 E44 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:49:y:2014:i:c:p:169-177
DOI: 10.1016/j.jbankfin.2014.09.005
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