Did Credit Decouple from Output in the Great Moderation?

Maria Grydaki () and Dirk Bezemer

MPRA Paper from University Library of Munich, Germany

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.

Keywords: great moderation; credit; output; VAR; financial fragility (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 E44 (search for similar items in EconPapers)
Date: 2013-06-05
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (1)

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