Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks

52 Pages Posted: 17 Oct 2012

See all articles by James M. Nason

James M. Nason

North Carolina State University - Department of Economics

Ellis W. Tallman

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Multiple version iconThere are 2 versions of this paper

Date Written: October 4, 2012

Abstract

This paper explores the hypothesis that the sources of economic and financial crises differ from non-crisis business cycle fluctuations. We employ Markov-switching Bayesian vector autoregressions (MS-BVARs) to gather evidence about the hypothesis on a long annual U.S. sample running from 1890 to 2010. The sample covers several episodes useful for understanding U.S. economic and financial history, which generate variation in the data that aids in identifying credit supply and demand shocks. We identify these shocks within MS-BVARs by tying credit supply and demand movements to inside money and its intertemporal price. The model space is limited to stochastic volatility (SV) in the errors of the MS-BVARs. Of the 15 MS-BVARs estimated, the data favor a MS-BVAR in which economic and financial crises and non-crisis business cycle regimes recur throughout the long annual sample. The best-fitting MS-BVAR also isolates SV regimes in which shocks to inside money dominate aggregate fluctuations.

Keywords: inside money, credit shock, Bayesian vector autoregression, Markov-switching, stochastic volatility

JEL Classification: E37, E44, E47, E51, N11, N12

Suggested Citation

Nason, James M. and Tallman, Ellis W., Business Cycles and Financial Crises: The Roles of Credit Supply and Demand Shocks (October 4, 2012). FRB of Philadelphia Working Paper No. 12-24, Available at SSRN: https://ssrn.com/abstract=2161973 or http://dx.doi.org/10.2139/ssrn.2161973

James M. Nason (Contact Author)

North Carolina State University - Department of Economics ( email )

Campus Box 8110
NC State University
Raleigh, NC 27695-8110
United States
(919) 513-2884 (Phone)
(919) 515-5613 (Fax)

Ellis W. Tallman

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
93
Abstract Views
925
rank
260,223
PlumX Metrics