Publicação
The great moderation and the financial cycle
| Resumo: | We show that the defining features of the Great Moderation were a shift from output volatility to mediumterm fluctuations and a shift in the origin of those fluctuations from the real to the financial sector. We discover a Granger-causal relationship by which financial cycles attenuate short-term business cycle fluctuations while they amplify longer-term fluctuations at the same time. As a result, financial shocks systematically drive medium-term output fluctuations whereas real shocks drive short-term output fluctuations. We use these results to argue that the Great Moderation and Great Recession both result from the same economic forces. On the theoretical front, we show that long-run risk is a critical ingredient of DSGE models with financial sectors that seek to replicate these shifts. Finally, we used this DSGE model to refine “good luck” and “good policy” hypothesis of the Great Moderation |
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| Autores principais: | Lucke, Friedrich |
| Assunto: | Great Moderation Business Cycle Financial Cycle Frequency-Domain |
| Ano: | 2022 |
| País: | Portugal |
| Tipo de documento: | working paper |
| Tipo de acesso: | acesso aberto |
| Instituição associada: | Universidade de Lisboa |
| Idioma: | inglês |
| Origem: | Repositório da Universidade de Lisboa |
| Resumo: | We show that the defining features of the Great Moderation were a shift from output volatility to mediumterm fluctuations and a shift in the origin of those fluctuations from the real to the financial sector. We discover a Granger-causal relationship by which financial cycles attenuate short-term business cycle fluctuations while they amplify longer-term fluctuations at the same time. As a result, financial shocks systematically drive medium-term output fluctuations whereas real shocks drive short-term output fluctuations. We use these results to argue that the Great Moderation and Great Recession both result from the same economic forces. On the theoretical front, we show that long-run risk is a critical ingredient of DSGE models with financial sectors that seek to replicate these shifts. Finally, we used this DSGE model to refine “good luck” and “good policy” hypothesis of the Great Moderation |
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