Economic Volatility and Financial Markets: The Caseof Mortgage-Backed Securities
April 29, 2013
The volatility of aggregate economic activity in the United States decreased markedlyin the mid eighties. The decrease involved several components of GDP and has beenlinked to a more stable economic environment, identiﬁed by smaller shocks and moreeﬀective policy, and a diverse set of innovations related to inventory management aswell as ﬁnancial markets. We document a negative relation between the volatility of GDP and some of its components and one such ﬁnancial development: the emergenceof mortgage-backed securities. We also document that this relationship changed sign,from negative to positive, in the early 2000’s.
We wish to thank without implicating Sean Campbell, Steve Fazzari, Michael Gordy, James Kennedy,James Morley, Bruce Petersen, Jeremy Piger, Todd Prono, Frank Schorfheide, Tara Sinclair, and seminarparticipants at the Board of Governors and Midwest Macroeconomics Meetings for constructive comments.We also would like to thank Leah Brooks and Jane Dokko for their help with data. Katherine Hamilton,Matt Hayward, Bobak Moallemi, Waldo Ojeda, and Ran Tao provided excellent research assistance. Allerrors are our own. Any views are of the authors alone and do not represent the views of the Board of Governors of the Federal Reserve System.
Board of Governors of the Federal Reserve System and Washington University in Saint Louis, email@example.com
Board of Governors of the Federal Reserve System, firstname.lastname@example.org