Financial Frictions, the Financial Immoderation, and the Great Moderation∗
نویسنده
چکیده
Balance-sheet variables of firms have been characterized by greater volatility since the early 1970s. This Financial Immoderation has coexisted with the so-called Great Moderation, which refers to the slowdown in volatility of real and nominal variables since the mid 1980s. In this paper, we examine the divergent patterns in volatility by considering the role played by financial factors. To do so, we use a DSGE model including real, nominal, and financial frictions. We estimate the model allowing for structural breaks in the volatilities of shocks, the monetary policy coefficients, and the average level of financial rigidities. We conclude that (i) the Financial Immoderation is driven by larger financial shocks, (ii) the estimated reduction in the mid 1980s of the average level of financial rigidities accounts for 30% of the decline in investment volatility, (iii) the main drivers of investment volatility are technology shocks until 1984 and financial shocks in the following decades, and (iv) the propagation mechanism of financial shocks has changed significantly since 1984.
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