Aggregate Price Shocks and Financial Instability: An Historical Analysis

Michael Bordo, Michael Dueker and David Wheelock

No 7652, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents empirical evidence on the hypothesis that aggregate price disturbances cause or worsen financial instability. We construct two annual indexes of financial conditions for the United States covering 1790-1997, and estimate the effect of aggregate price shocks on each index using a dynamic ordered probit model. We find that price level shocks contributed to financial instability during 1790-1933, and that inflation rate shocks contributed to financial instability during 1980-97. Our research indicates that the size of the aggregate price shocks needed to substantially alter financial conditions depends on the institutional environment, but that a monetary policy focused on price stability would be conducive to financial stability.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2000-04
New Economics Papers: this item is included in nep-his and nep-mon
Note: DAE
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Citations: View citations in EconPapers (54)

Published as Bordo, Michael D., Michael J. Dueker and David C. Wheelock. "Aggregate Price Shocks And Financial Instability: A Historical Analysis," Economic Inquiry, 2002, v40(4,Oct), 521-538.

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Related works:
Journal Article: Aggregate Price Shocks and Financial Instability: A Historical Analysis (2002)
Working Paper: Aggregate price shocks and financial instability: a historical analysis (2001)
Working Paper: Aggregate Price Shocks and Financial Instability: An Historical Analysis (2000)
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