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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmoneco.2005.10.012 Byline: Karen E. Dynan, Douglas W. Elmendorf, Daniel E. Sichel 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. Author Affiliation: Division of Research and Statistics, Federal Reserve Board, Washington, DC 20551, USA Article History: Received 4 October 2005; Accepted 27 October 2005 Article Note: (footnote) [star] This paper was prepared for the April 2005 Carnegie-Rochester Conference on Public Policy, 'Financial Innovation, Risk, and Fragility.' We thank Darrel Cohen, Wendy Edelberg, William English, Joshua Gallin, Marvin Goodfriend, Stephen Oliner, Michael Palumbo, John Roberts, Jessica Wachter, David Wilcox, and conference participants for helpful comments, and Blake Bailey, Thomas Bridges, and Adam McGlashan for research assistance. An appendix available from the authors includes tables and figures not included in the published version of the paper as well as a brief review of the evidence regarding the leading hypotheses for the moderation in economic activity. The views expressed in the paper are our own and not necessarily those of the Federal Reserve Board or other members of its staff.