Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-10T16:16:03.321Z Has data issue: false hasContentIssue false
  • English
  • Français

BUSINESS CYCLES AND FINANCIAL CRISES: THE ROLES OF CREDIT SUPPLY AND DEMAND SHOCKS

Published online by Cambridge University Press:  11 February 2014

James M. Nason  and
Ellis W. Tallman
James M. Nason*
Affiliation:
North Carolina State University and Centre for Applied Macroeconomic Analysis
Ellis W. Tallman
Affiliation:
Oberlin College and Federal Reserve Bank of Cleveland
*
Address correspondence to: James M. Nason, Department of Economics, Campus Box 8110, North Carolina State University, Raleigh, NC 27695-8110, USA: e-mail: jmnason@ncsu.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper explores the hypothesis that the sources of economic and financial crises differ from those of noncrisis 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 noncrisis 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 MoneyCredit ShockBayesian Vector AutoregressionMarkov SwitchingStochastic Volatility
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 4: Empirical Analysis of Business Cycles, Financial Markets, and Inflation: Essays in Honor of Charles Nelson , June 2015 , pp. 836 - 882
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adjemian, Stéphane, Bastani, Houtan, Juillard, Michel, Maih, Junior, Mihoubi, Ferhat, Prerndia, George, Ratto, Marco, and Villemot, Sébastien (2012) Dynare: Reference Manual Version 2012-04-18. Dynare working paper 1, CEPREMAP, Paris, France.Google Scholar
Ahmadi, Pooyan Amir (2009) Credit Shocks, Monetary Policy, and Business Cycles: Evidence from a Structural Time Varying Bayesian FAVAR. Manuscript, Goethe University, Frankfurt, Germany.Google Scholar
Anari, Ali, Kolari, James, and Mason, Joseph (2005) Bank asset liquidation and the propagation of the U.S. Great Depression. Journal of Money, Credit and Banking 37, 753–773.CrossRefGoogle Scholar
Balke, Nathan S. and Gordon, Robert J. (1986) Appendix B: Historical data. In Gordon, Robert J. (ed.), The American Business Cycle: Continuity and Change, pp. 781–850. Chicago: University of Chicago Press.Google Scholar
Board of Governors of the Federal Reserve System (1976a) All Bank Statistics, 1896–1955. Washington, DC.Google Scholar
Board of Governors of the Federal Reserve System (1976b) Banking and Monetary Statistics, 1914–1941. Washington, DC.Google Scholar
Bordo, Michael D. and Haubrich, Joseph G. (2010) Credit crises, money, and contractions: An historical view. Journal of Monetary Economics 57, 1–18.CrossRefGoogle Scholar
Brunnermeier, Markus K. (2009) Deciphering the liquidity and credit crunch 2007–2008. Journal of Economic Perspectives 23, 77–100.CrossRefGoogle Scholar
Bussiere, Matthieu and Fratzscher, Marcel (2006) Towards a new early warning system of financial crises. Journal of International Money and Finance 25, 953–973.CrossRefGoogle Scholar
Calomiris, Charles W. and Gorton, Gary B. (1991) The origins of banking panics: Models, facts, and bank regulation. In Hubbard, R. Glenn (ed.), Financial Markets and Financial Crises, pp. 109–173. Chicago: University of Chicago Press.Google Scholar
Canova, Fabio (1991) The sources of financial crisis: Pre- and post-Fed evidence. International Economic Review 32, 689–713.CrossRefGoogle Scholar
Canova, Fabio (1994) Were financial crises predictable? Journal of Money, Credit and Banking 26, 102–124.CrossRefGoogle Scholar
Carter, Susan B., Gartner, Scott S., Haines, Michael R., Olmsted, Alan L., Sutch, Richard, and Gavin Wright (2006) Historical Statistics of the United States: Millennial Edition. Cambridge, MA: Cambridge University Press.Google Scholar
Chin, Alycia and Warusawitharana, Missaka (2010) Financial market shocks during the Great Depression. B.E. Journal of Macroeconomics 10, Article 25.CrossRefGoogle Scholar
Ciccarelli, Matteo, Maddaloni, Angela, and Peydró, José-Luis (2010) A New Look at the Credit Channel of Monetary Policy. ECB working paper 1228, European Central Bank, Frankurt, Germany.Google Scholar
Claessens, Stijn, Kose, M. Ayhan, and Terrones, Marco E. (2011) Financial Cycles: What? How? When? IMF working paper WP/11/76, IMF, Washington, DC.Google Scholar
Coe, Patrick J. (2002) Financial crisis and the Great Depression: A regime switching approach. Journal of Money, Credit and Banking 34, 76–93.CrossRefGoogle Scholar
Cogley, Tim and Sargent, Thomas J. (2005) Drifts and volatilities: Monetary policies and outcomes in the post WWII US. Review of Economic Dynamics 8, 262–302.CrossRefGoogle Scholar
Diebolt, Claude, Parent, Antoine, and Trabelsi, Jamel (2010) Revisiting the 1929 Crisis: Was the Fed Pre-Keynesian? New Lessons from the Past. Working paper 10-11, Association Française de Cliométrie.Google Scholar
Donaldson, R. Glen (1992) Sources of panics: Evidence from the weekly data. Journal of Monetary Economics 30, 277–305.CrossRefGoogle Scholar
Eichengreen, Barry and Mitchener, Kris (2003) The Great Depression as a Credit Boom Gone Wrong. Working paper 137, Bank for International Settlements, Basel, Switzerland.CrossRefGoogle Scholar
Eickmeier, Sandra and Ng, Tim (2011) How Do Credit Supply Shocks Propagate Internationally? A GVAR Approach. Discussion paper 27/2011, Deutsche Bundesbank, Frankfurt, Germany.CrossRefGoogle Scholar
Gambetti, Luca and Musso, Alberto (2012) Loan Supply Shocks and the Business Cycle. ECB working paper 1469, European Central Bank, Frankfurt, Germany.CrossRefGoogle Scholar
Gorton, Gary B. (1988) Banking panics and business cycles. Oxford Economic Papers 40, 751–781.CrossRefGoogle Scholar
Gorton, Gary B. (2010) Slapped by the Invisible Hand: The Panic of 2007. New York: Oxford University Press.Google Scholar
Gorton, Gary B. and Ordoñez, Guillermo (2012) Collateral Crises. Manuscript, Yale School of Management, New Haven, CT.CrossRefGoogle Scholar
Gourinchas, Pierre-Olivier and Obstfeld, Maurice (2012) Stories of the twentieth century for the twenty-first. American Economic Journal: Macroeconomics 4, 226–265.Google Scholar
Hamilton, James D. (1994) Time Series Analysis. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Helbling, Thomas, Huidrom, Raju, Kose, M. Ayhan, and Otrok, Christoper (2011) Do credit shocks matter? A global perspective. European Economic Review 55, 340–353.CrossRefGoogle Scholar
Homer, Sidney and Sylla, Richard (2005) A History of Interest Rates, 4th ed.Hoboken, NJ: Wiley & Sons.Google Scholar
Jalil, Andrew J. (2012) A New History of Banking Panics in the United States, 1825–1929: Construction and Implications. Manuscript, Department of Economics, Reed College, Portland, OR.Google Scholar
Jeffreys, Harold (1998) The Theory of Probability, 3rd ed. Oxford, UK: Oxford University Press.CrossRefGoogle Scholar
Johnston, Louis and Williamson, Samuel H. (2011) What was the U.S. GDP then? Available at http://www.measuringworth.org/usgdp/.Google Scholar
Jordà, Òscar, Schularick, Moritz, and Taylor, Alan M. (2011a) Financial crises, credit booms, and external imbalances: 140 years of lessons. IMF Economic Review 59, 340–378.CrossRefGoogle Scholar
Jordà, Òscar, Schularick, Moritz, and Taylor, Alan M. (2011b) When Credit Bites Back: Leverage, Business Cycles, and Crises. NBER working paper 17621, Cambridge, MA.CrossRefGoogle Scholar
Kim, Chang-Jin (1994) Dynamic linear models with Markov-switching. Journal of Econometrics 60, 1–22.CrossRefGoogle Scholar
Kim, Chang-Jin and Nelson, Charles R. (1999) State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications. Cambridge, MA: MIT Press.Google Scholar
King, Robert G. and Plosser, Charles I. (1984) Money, credit, and prices in a real business cycle. American Economic Review 74, 363–380.Google Scholar
Krishnamurthy, Arvind and Vissing-Jorgensen, Annette (2010) The aggregate demand for Treasury debt. Journal of Political Economy 120, 233–267.CrossRefGoogle Scholar
Leeper, Eric M., Sims, Christopher A., and Zha, Tao (1996) What does monetary policy do? Brookings Papers on Economic Activity 27, 1–78.CrossRefGoogle Scholar
Mendoza, Enrique G. and Terrones, Marco E. (2008) An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data. NBER working paper 14049, Cambridge, MA.CrossRefGoogle Scholar
Nason, James M. and Smith, Gregor W. (2008) Great moderation(s) and US interest rates: Unconditional evidence. B.E. Journal of Macroeconomics 8, Article 30.CrossRefGoogle Scholar
Officer, Lawrence H. (2011) What was the interest rate then? MeasuringWorth, available at http://www.measuringworth.com/interestrates/.Google Scholar
Parent, Antoine (2012) A critical note on This Time Is Different. Cliometrica 6, 211–219.CrossRefGoogle Scholar
Primiceri, Giorgio E. (2005) Time varying structural vector autoregressions and monetary policy. Review of Economic Studies 72, 821–852.CrossRefGoogle Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2009) This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2011) From financial crash to debt crisis. American Economic Review 101, 1676–1706.CrossRefGoogle Scholar
Robertson, John C. and Tallman, Ellis W. (2001) Improving federal-funds rate forecasts in VAR models used for policy analysis. Journal of Business and Economic Statistics 19, 324–330.CrossRefGoogle Scholar
Schularick, Moritz and Taylor, Alan M. (2012) Credit booms gone bust: Monetary policy, leverage cycles, and financial crises, 1870–2008. American Economic Review 102, 1029–1061.CrossRefGoogle Scholar
Shiller, Robert J. (2005) Irrational Exuberance. Princeton, NJ: Princeton University Press.Google Scholar
Silber, William L. (2007) When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy. Princeton, NJ: Princeton University Press.Google Scholar
Sims, Christopher A., Waggoner, Daniel F., and Zha, Tao (2008) Methods for inference in large multiple-equation Markov-switching models. Journal of Econometrics 146, 255–274.CrossRefGoogle Scholar
Sims, Chistopher A. and Tao Zha (1998) Bayesian methods for dynamic multivariate models. International Economic Review 39, 949–968.CrossRefGoogle Scholar
Sims, Christopher A. and Tao Zha (2006) Were there regime switches in U.S. monetary policy? American Economic Review 96, 54–81.CrossRefGoogle Scholar
United States League of Savings Associations (1957–1978) Savings and Loan Sourcebook. Chicago.Google Scholar
United States Savings and Loan League (1979–1984) Savings and Loan Fact Book. Chicago.Google Scholar
Waggoner, Daniel F. and Zha, Tao (2003a) A Gibbs sampler for structural vector autoregressions. Journal of Economic Dynamics and Control 28, 349–366.CrossRefGoogle Scholar
Waggoner, Daniel F. and Zha, Tao (2003b) Likelihood preserving normalization in multiple equation models. Journal of Econometrics 114, 329–347.CrossRefGoogle Scholar
Weir, David R. (1992) A century of U.S. unemployment, 1890–1990. In Ransom, Roger L., Sutch, Richard, and Carter, Susan B. (eds.), Research in Economic History, Vol. 14, pp. 301–346. Greenwich, CT: JAI Press, Inc.Google Scholar
Wicker, Elmus R. (2000) The Banking Panics of the Gilded Age. New York: Cambridge University Press.CrossRefGoogle Scholar
Wicker, Elmus R. (2005) The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed. Columbus: Ohio State University Press.Google Scholar