The Role of Credit in Great Moderation: a Multivariate GARCH Approach

Maria Grydaki () and Dirk J. Bezemer

MPRA Paper from University Library of Munich, Germany

Abstract: During the Great Moderation, financial innovation in the U.S. increased the size and scope of credit flows supporting the growth of wealth. We hypothesize that spending out of wealth came to finance a wider range of GDP components such that it smoothed GDP. Both these trends combined would be consistent with a decrease in the volatility of output. We suggest testable implications in terms of both growth of credit and output and volatility of growth. In a multivariate GARCH framework, we test this view for home mortgages and residential investment. We observe unidirectional causality in variance from total output, residential investment and non-residential output to mortgage lending before, but not during the Great Moderation. These findings are consistent with a role for credit dynamics in explaining the Great Moderation.

Keywords: great moderation; mortgage credit; multivariate GARCH; causality (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 E44 (search for similar items in EconPapers)
Date: 2012-06-28
New Economics Papers: this item is included in nep-ban and nep-ure
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The role of credit in the Great Moderation: A multivariate GARCH approach (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:39813

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