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http://ssrn.com/abstract=873871
 
 

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Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?


Karen E. Dynan


Brookings Institution

Douglas W. Elmendorf


Government of the United States of America, Congress, Congressional Budget Office (CBO)

Daniel E. Sichel


Wellesley College; NBER

November 2005

FEDs Working Paper No. 2005-54

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: financial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and firms 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 influence of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization.

Number of Pages in PDF File: 55

Keywords: Economic fluctuations, volatility, financial innovation, financial deregulation

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Date posted: January 5, 2006  

Suggested Citation

Dynan, Karen E. and Elmendorf, Douglas W. and Sichel, Daniel E., Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity? (November 2005). FEDs Working Paper No. 2005-54. Available at SSRN: http://ssrn.com/abstract=873871 or http://dx.doi.org/10.2139/ssrn.873871

Contact Information

Karen E. Dynan
Brookings Institution ( email )
1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
Douglas W. Elmendorf
Government of the United States of America, Congress, Congressional Budget Office (CBO) ( email )
Ford House Office Building
2nd & D Streets, SW
Washington, DC 20515-6925
United States
Daniel E. Sichel (Contact Author)
Wellesley College ( email )
106 Central St.
Wellesley, MA 02181
United States
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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