Financial Innovation, Macroeconomic Volatility and the Great Moderation

Lorenzo Bencivelli, Andrea Zaghini

Bank of Italy, Research Department—Servizio Studi di Congiuntura e Politica Monetaria, Rome, Italy.

DOI: 10.4236/me.2012.35071                

Abstract

In the paper we propose an assessment of the role of financial innovation in shaping US macroeconomic dynamics. We extend an existing model by Christiano, Eichenbaum and Evans which studied the transmission of monetary policy im- pulses to business and corporate sector financing variables just before the Great Moderation period. By investigating the properties of the model over a longer time span we show that in the later period a change in the monetary policy trans- mission mechanism is likely to have occurred. In particular, we argue that the role of financial innovation has signify- cantly altered the transmission of shocks.

Keywords

Great Moderation; Monetary Policy; Financial Innovation

Conflicts of Interest

The authors declare no conflicts of interest.

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