Bezemer, Dirk J and Grydaki, Maria (2012): Mortgage Lending and the Great moderation: a multivariate GARCH Approach.
Download (216kB) | Preview
Financial innovation during the Great Moderation increased the size and scope of credit flows in the US. Credit flows increased both in volume and with regard to the range of activities and investments that was debt-financed. This may have contributed to the reduction in output volatility that was the Great Moderation. We hypothesize that during the Great Moderation (i) growth in mortgage finance partly decoupled from fundamentals as measured by overall output growth and (ii) this allowed mortgages less to finance residential investment and more to finance spending on other GDP components. We document that the start of the Moderation coincided with a surge in bank credit creation (especially mortgage credit), a rise in property income, a rise in the consumption share of GDP, and a change in correlation (from positive to negative) between consumption and non-consumption GDP components (investment, export and government expenditure). In a multivariate GARCH framework, we observe unidirectional causality in variance from total output to mortgage lending before the Great Moderation, which is no longer detectable during the Great Moderation. We also find that bidirectional causality in variance of home mortgage lending and residential investment existed before, but not during the Great Moderation. Both these findings are consistent with a role for credit dynamics in explaining the Great Moderation.
|Item Type:||MPRA Paper|
|Original Title:||Mortgage Lending and the Great moderation: a multivariate GARCH Approach|
|Keywords:||great moderation; mortgage credit; multivariate GARCH; causality|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
|Depositing User:||Dirk J Bezemer|
|Date Deposited:||03. Feb 2012 11:51|
|Last Modified:||27. Apr 2015 19:03|
Acemoglou, D. and F. Zilibotti (1997), “Was Prometheus Unbound by Chance? Risk, Diversification, and Growth,” Journal of Political Economy 105: 709-51.
Acemoglou, D., S. Johnson, J. Robinson and Y. Thaicharoen (2003), “Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth,” Journal of Monetary Economics 50: 49-123.
Ahmed, S., A. Levin and B. Wilson (2002), “Recent U.S. Macroeconomic Stability: Good Luck, Good Policies, or Good Practices?,” International Finance Discussion Papers 730, Board of Governors of the Federal Reserve System (U.S.).
Alaganar, V. and R. Bhar (2003), “An International Study of Causality-in-Variance: Interest Rate and Financial Sector Returns,” Journal of Economics and Finance 27: 39-55.
Barnett, W. and M. Chauvet (forthcoming), “The End of the Great Moderation? How Better Monetary Statistics Could Have Signaled the Systemic Risk Precipitating the Financial Crisis,” Journal of Econometrics Annals.
Bauwens, L., S. Laurent and J. Rombouts (2006), “Multivariate GARCH Models: A Survey,” Journal of Applied Econometrics 21: 79-109.
Bean, C. (2011), “Joseph Schumpeter Lecture: The Great Moderation, the Great Panic, and the Great Contraction,” Journal of the European Economic Association 8: 289-325. Benati, L. and P. Surico (2009), “VAR Analysis and the Great Moderation,” American Economic Review 99: 1636-52.
Benk, S., M. Gillman and M. Kejak (2005), “Credit Shocks in the Financial Deregulatory Era: Not the Usual Suspects,” Review of Economic Dynamics 8: 668-87.
Bernanke, B. (1993), “Credit in the Macroeconomy,” Quarterly Review, Federal Reserve Bank of New York issue Spr: 50-70.
Bernanke, B. (2004), “The Great Moderation,” Speech at the meetings of the Eastern Economic Association, Washington, D.C., February 20.
Bernanke, B. and M. Gertler (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives 9: 27-48.
Blanchard, O. and J. Simon (2001), “The Long and Large Decline in U.S. Output Volatility,” Brookings Papers on Economic Activity 1: 135-74.
Bliss, R. and G. Kaufmann (2003), “Bank Procyclicality, Credit Crunches, and Asymmetric Policy Effects: A Unifying Model,” Journal of Applied Finance 13: 23-31.
Boivin, J., and M. Giannoni (2006), “Has Monetary Policy Become More Effective?,” The Review of Economics and Statistics 88: 445-62.
Bollerslev, T, R Engle and J Wooldridge (1988), “A Capital Asset Pricing Model with Time Varying Covariances,” Journal of Political Economy 96: 116-31.
Bollerslev, T. (1986), “Generalized Autoregressive Conditional Heteroskedasticity,” Journal of Econometrics 31: 307-27.
Bollerslev, T. (1990), “Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized Arch Model,” The Review of Economics and Statistics 72: 498-505.
Borio, C. and A. Lowe (2004), “Should Credit Come back from the Wilderness?,” Bank of International Settlements Working Paper No. 157.
Campbell, S. (2005), “Stock Market Volatility and the Great Moderation,” FEDS WP, 2005-47, Board of Governors of the Federal Reserve System.
Canning, D., L.A.N. Amaral, Y. Lee, M. Meyer and H.E. Stanley (1998), “Scaling the Volatility of the GDP Growth Rate,” Economics Letters 60: 335-41.
Caporale, G. and P. Howells (2001), “Money, Credit and Spending: Drawing Causal Inferences,” Scottish Journal of Economics 48: 547-57.
Caporale, G., N. Pittis and N. Spagnolo (2002), “Testing for Causality-in-Variance: An Application to the East Asian Markets,” International Journal of Finance and Economics 7: 235-45.
Carroll, C., M. Otsuka and J. Slacalek (2006), “How Large Is the Housing Wealth Effect? A New Approach,” NBER Working Paper No. 12746.
Cechetti, A. and S. Krause (2006), “Assessing the Sources of Changes in Volatility of Real Growth,” NBER Working Paper No. 11946.
Cheung, Y. and L. Ng (1996), “A Causality-in-Variance Test and its Application to Financial Market Prices,” Journal of Econometrics 72: 33-48.
Clarida, R., J. Gali, and M. Gertler (2000), “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” The Quarterly Journal of Economics 115: 147-80.
Cogley, T. and T. Sargent (2005), “Drifts and Volatilities: Monetary Policy and Outcomes in the Post-WWII US”, Review of Economic Dynamics 8: 262-302.
Davis S. and J. Kahn (2008), “Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels,” Journal of Economic Perspectives 22: 155-80.
Den Haan, W. and V. Sterk (2010), “The Myth of Financial Innovation and the Great Moderation,” The Economic Journal 121: 707-39.
Dickey, D. and W. Fuller (1979), “Distribution of the Estimators of Autoregressive Time Series with a Unit Root,” Journal of the American Statistical Association 74: 427-31.
Dijk, D. van, D. Osborn and M. Sensier (2005), “Testing for Causality in Variance in the Presence of Breaks,” Economics Letters 89: 193-99.
Dynan, K., D. Elmendorf and D. Sichel (2006), “Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?,” Journal of Monetary Economics 53: 123-50.
Easterly, W., M. Kremer, L. Pritchett and L. Summers (1993), “Good Policy or Good Luck? Country Growth Performance and Temporary Shocks,” Journal Of Monetary Economics 32:459-83.
Easterly, W., R. Islam and J. Stiglitz (2000), “Shaken and Stirred: Explaining Growth Volatility,” Paper at the 2000 Annual World Bank Conference on Development Economics.
Engle, R. (1982), “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of United Kingdom Inflation,” Econometrica 50: 987-1007.
Engle, R. (2002), “Dynamic Conditional Correlation-A Simple Class of Multivariate GARCH Models,” Journal of Business and Economic Statistics 20: 339-50.
Engle, R. and K. Kroner (1995), “Multivariate Simultaneous Generalized ARCH,” Econometric Theory 11: 122-50.
Fang, W. and S. Miller (2008), “The Great Moderation and the Relationship between Output Growth and its Volatility,” Southern Economic Journal 74: 819-38.
Fogli, A. and F. Perri (2006), “The "Great Moderation" and the US External Imbalance,” NBER Working Paper No. 12708.
Gambetti, L., E. Pappa, and F. Canova (2008), “The Structural Dynamics of US Output and Inflation: What Explains the Changes?,” Journal of Money, Credit, and Banking 40: 369–88.
Glymour, C. and G. Cooper (1999), Computation, Causation, and Discovery, The MIT Press, Cambridge, MA, USA.
Greenspan A. and J. Kennedy (2008), “Sources and Uses of Equity Extracted from Homes.” Oxford Review of Economic Policy 24: 120-44.
Guerron-Quintana, P. (2009), “Money Demand Heterogeneity and the Great Moderation,” Journal of Monetary Economics 56: 255-66.
Hafner, C. and H. Herwartz (2004), “Testing for Causality in Variance Using Multivariate GARCH Models,” Working Paper No. 03.
Hamilton, J. (2008), “Macroeconomics and ARCH,” NBER Working Paper No. 14151.
Hong, Y (2003), “Extreme Risk Spillover between Chinese Stock Markets and International Stock Markets,” Working Paper.
Hong, Y. (2001), “A Test for Volatility Spillover with Application to Exchange Rates,” Journal of Econometrics 103: 183-224.
Jaimovich, N. and H. Siu (2009), “The Young, the Old, and the Restless: Demographics and Business Cycle Volatility,” American Economic Review 99: 804–26.
Kahn, J., M. McConnell and G. Perez-Quiros (2002), “On the causes of the increased stability of the U.S. economy,” Federal Reserve Bank of New York Economic Policy Review 8: 183-202.
Kanas, A. and G. Kouretas (2002), “Mean and Variance Causality between Official and Parallel Currency Markets: Evidence form Four Latin American Countries,” The Financial Review 37: 137-64.
Kemme, D. and S. Roy (2012), “Did the Recent Housing Boom Signal the Global Financial Crisis?,” Southern Economic Journal 78: 999-1018.
Kim, C. and C. Nelson (1999), “Has the U.S. Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle,” Review of Economics and Statistics 81: 08-16.
Kiyotaki, N. and J. Moore (1997), “Credit Cycles,” Journal of Political Economy 105: 211-48.
Kocherlakota, N. (2000), “Creating Business Cycles Through Credit Constraints,” Federal Reserve Bank of Minneapolis Quarterly Review 24: 2-10.
Kwiatkowski, D., P Phillips, P. Schmidt and Y. Shin (1992), “Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root,” Journal of Econometrics 53: 159-78.
Laurent, S. and J-P Peters (2002), “G@RCH 2.2: An OX Package for Estimating and Forecasting Various ARCH Models,” Journal of Economic Surveys 16: 447-85.
Li, G., J. Refalo and L. Wu (2008), “Causality-in-Variance and Causality-in-Mean among European Government Bond Markets,” Applied Financial Economics 18: 1709-20.
Lorrain, B. (2006), “Do Banks Affect the Level and Composition of Industrial Volatility?,” The Journal of Finance 61: 1897–925.
Lown C. and D. Morgan (2006), “The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey,” Journal of Money, Credit, and Banking 38: 1575-97.
Lubik, T., and F. Schorfheide (2003), “Computing Sunspot Equilibria in Linear Rational Expectations Models,” Journal of Economic Dynamics and Control 28: 273-85.
McCarthy, J. and E. Zakrajsek (2007), “Inventory Dynamics and Business Cycles: What Has Changed?,” Journal of Money, Credit and Banking 39: 591-613.
McConnell, M. and G. Perez-Quiros (2000), “Output Fluctuations in the United States: What Has Changed since the Early 1980’s,” American Economic Review 90: 1464-76.
Mendicino, A. (2007), “Credit Market and Macroeconomic Volatility,” European Central Bank Working Paper Series No. 743.
Nakov, A. and A. Pescatori (2010), “Oil and the Great Moderation,” The Economic Journal 120: 131-56.
Owyang, M.T., J. Piger and H. Wall (2007), “A State-Level Analysis of the Great Moderation,” Federal Reserve Bank of St Louis, Working Paper No. 003B.
Pantelidis, T. and N. Pittis (2004), “Testing for Granger Causality in Variance in the Presence of Causality in Mean,” Economics Letters 85: 201-7.
Phillips, P. and P. Perron (1988), “Testing for a Unit Root in Time Series Regression,” Biometrika Trust 75: 335-46.
Primiceri, G. (2005), “Time Varying Structural Vector Autoregressions and Monetary Policy,” The Review of Economic Studies 72: 821-52.
Sims, C. and T. Zha (2006), “Were There Regime Switches in U.S. Monetary policy?,” American Economic Review 96: 54-81.
Spirtes, P., C. Glymour and R. Scheines (2000), Causation, Prediction and Search, The MIT Press, Cambridge, MA, USA.
Stock, J. and M. Watson, “Has the Business Cycle Changed and Why?,” National Bureau of Economic Research, Inc., working paper 9127 (2002).
Summers, P. (2005), “What Caused the Great Moderation? Some Cross-Country Evidence,” Federal Reserve Bank of Kansas City Economic Review, 3rd Quarter.
Tse, Y. and A. Tsui (2002), “A Multivariate GARCH Model with Time-Varying Correlations,” Journal of Business and Economic Statistics 20: 351-62.
Uhlig, H. (2004), “What Moves GNP?,” Econometric Society 2004 North American Winter Meetings 636.
Warnock, M. and F. Warnock (2000), “The Declining Volatility of U.S. Employment: Was Arthur Burns Right?,” Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 677.