DP5727 | Financial Innovations and Macroeconomic Volatility

Publication Date

20/06/2006

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

The volatility of US business cycle 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 volatile in the financial structure of firms.