Keywords: Economic fluctuations, volatility, financial innovation, financial deregulation
Abstract: The stabilization of economic activity in the mid 1980s has received considerable attention. Research has
focused primarily on the role played by milder economic shocks, improved inventory management, and better
monetary policy. This paper explores another potential explanation: financial innovation. Examples of such
innovation include developments in lending practices and loan markets that have enhanced the ability of households
and firms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of
simple empirical techniques to identify links between the observed moderation in economic activity and the influence
of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest
that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization.
Full paper (425 KB PDF)
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Last update: August 16, 2007