Economic Volatility and Financial Markets: The Case of Mortgage-Backed Securities
33 Pages Posted: 31 Jul 2013
Date Written: April 29, 2013
The volatility of aggregate economic activity in the United States decreased markedly in the mid eighties. The decrease involved several components of GDP and has been linked to a more stable economic environment, identified by smaller shocks and more effective policy, and a diverse set of innovations related to inventory management as well as financial markets. We document a negative relation between the volatility of GDP and some of its components and one such financial development: the emergence of mortgage-backed securities. We also document that this relationship changed sign, from negative to positive, in the early 2000's.
Keywords: Mortgage backed securities, volatility, great moderation
JEL Classification: E3, G1
Suggested Citation: Suggested Citation