Aggregate Price Shocks and Financial Instability: An Historical Analysis

Topics:
Financial Research
Tags:
Analysis,
Finance,
Financial,
Financial Accounting,
Financial Instability
Source:
NBER.org: National Bureau of Economic Research

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Overview: This paper presents empirical evidence on the hypothesis that aggregate price disturbances cause or worsen financial instability. It construct two annual indexes of financial conditions for the United States covering 1790-1997, and estimate the effect of aggregate price shocks on each index using a dynamic ordered probit model. It was found that price level shocks contributed to financial instability during 1790-1933, and that inflation rate shocks contributed to financial instability during 1980-97. The research indicates that the size of the aggregate price shocks needed to substantially alter financial conditions depends on the institutional environment, but that a monetary policy focused on price stability would be conducive to financial stability.

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Format: PDF | Size: 204KB | Date: Apr 2000 | Pages: 51

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