Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks

James Nason and Ellis Tallman

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper explores the hypothesis that the sources of economic and financial crises differ from non-crisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and non-crisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.

Keywords: Inside money; Credit shock; Bayesian vector autoregression; Markov-switching; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: E37 E44 E47 E51 N11 N12 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2012-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://cama.crawford.anu.edu.au/sites/default/fil ... son_tallman_2012.pdf (application/pdf)

Related works:
Journal Article: BUSINESS CYCLES AND FINANCIAL CRISES: THE ROLES OF CREDIT SUPPLY AND DEMAND SHOCKS (2015)
Working Paper: Business cycles and financial crises: the roles of credit supply and demand shocks (2012)
Working Paper: Business cycles and financial crises: the roles of credit supply and demand shocks (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2012-44

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