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Article in Journal ()

Financial Fragility in the Great Moderation

Citation
Bezemer D & Grydaki M (2014) Financial Fragility in the Great Moderation, Journal of Banking and Finance, 49, pp. 169-177.

Abstract
A nascent literature explores the measurement of financial fragility. This paper considers evidence for rising financial fragility during the 1984-2007 Great Moderation in the U.S. The literature suggests that macroeconomic stability combined with strong growth of credit to asset markets, in asset prices and in credit relative to output are all indicators of rising financial fragility. We show each of these trends in the Great Moderation. We derive the testable implication that in the Great Moderation credit growth is driven more by past credit growth and less by output growth (Allen and Gale, 2000), relative to pre-Great Moderation years. Results from a VAR model estimated on quarterly data for 1955-2007 are consistent with the hypothesis. This invites a reinterpretation of the Great Moderation. Our methodology may help understand when a credit boom turns into a credit bubble, and contributes to the development of methods of measuring financial fragility.

Keywords
Financial fragility; Great moderation; Credit; Output; VAR

StatusPublished
AuthorsBezemer Dirk, Grydaki Maria
Publication date12/2014
Publication date online30/09/2014
PublisherElsevier
ISSN 0378-4266
LanguageEnglish

Journal
Journal of Banking and Finance: Volume 49

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