Financial Deregulation and the Great Moderation

I investigate the effects of financial deregulation on the volatility of macroeconomic variables. First, I develop a model of small business borrowing that explicitly incorporates borrowing costs. I embed the optimal small business borrowing contract model into a Dynamic Stochastic General Equilibrium model. I find that the borrowing costs are significant to the macroeconomy in my model, and that the pattern of borrowing costs changes over time. I obtain first and second order accurate parameter estimates, and conclude that the second order is significant to the model dynamics and parameter estimates.

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