The myth of financial innovation and the great moderation

Financial innovation is widely believed to be at least partly responsible for the recent financial
crisis. At the same time, there are empirical and theoretical arguments that support the view that
changes in financial markets, in particular, innovations in consumer credit and home mortgages,
played a role in the great moderation. This article questions empirical evidence supporting
this view. Especially the behaviour of aggregate home mortgages changed less during the great
moderation than is typically believed. A remarkable change we do find is that monetary tightenings
became episodes during which financial institutions other than banks increased their mortgages
holdings.