Working Paper: NBER ID: w12308
Authors: Urban Jermann; Vincenzo Quadrini
Abstract: The volatility of US business cycles has declined during the last two decades. During the same period the financial structure of firms has become more volatile. In this paper we develop a model in which financial factors play a key role in generating economic fluctuations. Innovations in financial markets allow for greater financial flexibility and generate a lower volatility of output together with a higher volatility in the financial structure of firms.
Keywords: Financial Innovations; Macroeconomic Volatility; Business Cycles
JEL Codes: E3; G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial innovations (O16) | lower output volatility (E39) |
| financial flexibility (G32) | lower output volatility (E39) |
| financial innovations (O16) | financial flexibility (G32) |
| financial flexibility (G32) | mitigate impact of economic shocks on output (F41) |
| financial innovations (O16) | increase volatility of financial structure of firms (G32) |