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Aggregate Price Shocks and Financial Instability: A Historical Analysis

Michael Bordo (), Michael Dueker and David Wheelock ()

Economic Inquiry, 2002, vol. 40, issue 4, 521-538

Abstract: This article presents evidence on the relationship between price and financial stability. We construct an annual index of financial conditions for the United States, 1790--1997, and estimate the effect of aggregate price shocks on the 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. The size of the aggregate price shock needed to alter financial conditions depends on the institutional environment, but we conclude that a monetary policy focused on price stability would contribute to financial stability. Copyright 2002, Oxford University Press.

Date: 2002
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Working Paper: Aggregate price shocks and financial instability: a historical analysis (2001) Downloads
Working Paper: Aggregate Price Shocks and Financial Instability: An Historical Analysis (2000) Downloads
Working Paper: Aggregate Price Shocks and Financial Instability: An Historical Analysis (2000) Downloads
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