Can financial innovation help to explain the reduced volatility of economic activity书.pdfVIP

ARTICLE IN PRESS Journal of Monetary Economics 53 (2006) 123–150 /locate/jme Can ?nancial innovation help to explain the reduced volatility of economic activity?$ Karen E. Dynan, Douglas W. Elmendorf, Daniel E. Sichel? Division of Research and Statistics, Federal Reserve Board, Washington, DC 20551, USA Received 4 October 2005; accepted 27 October 2005 Abstract The stabilization of economic activity in the mid 1980s has received considerable attention. Research has focused primarily on the role played by milder economic shocks, improved inventory management, and better monetary policy. This paper explores another potential explanation: ?nancial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and ?rms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of simple empirical techniques to identify links between the observed moderation in economic activity and the in?uence of ?nancial innovation on consumer spending, housing investment, and business ?xed investment. Our results suggest that ?nancial innovation should be added to the list of likely contributors to the mid-1980s stabilization. Published by Elsevier B.V. Keywords: Economic ?uctuations; Volatility; Financial innovation; Financial deregulation $This paper was prepared for the April 2005 Carnegie-Rochester Conference on Public Policy, ‘‘Financial Innovation, Risk, and Fragility.’’ We thank Darrel Cohen, Wendy Edelberg, William English, Joshua Gallin, Marvin Goodfriend, Stephen Oliner, Michael Palumbo, John Roberts, Jessica Wachter, David Wilcox, and conference participants for helpful comments, and Blake Bailey, Thomas Bridges, and Adam