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What does a financial shock do? First international evidence

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  • Fabio Fornari
  • Livio Stracca

Abstract

In this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions. We focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis. We estimate a panel VAR for 21 advanced economies based on quarterly data between 1985 and 2011, where financial shocks are identified through sign restrictions. Overall, we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as GDP and (particularly) investment, but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact. The financial development and the financial structure of a given country are found not to matter much for the intensity of the propagation of financial shocks. Moreover, we generally find that these shocks play a role not only in crisis times, but also in normal conditions. Finally, we discuss the implications of our findings for monetary policy. JEL Classification: E44, E52, E58, G20

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 27 (2012)
Issue (Month): 71 (07)
Pages: 407-445

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Handle: RePEc:bla:ecpoli:v:27:y:2012:i:71:p:407-445

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Cited by:
  1. Pinter, Gabor & Theodoridis, Konstantinos & Yates, Tony, 2013. "Risk news shocks and the business cycle," Bank of England working papers 483, Bank of England.
  2. Peter Broer & Jürgen Antony, 2013. "Financial Shocks and Economic Activity in the Netherlands," CPB Discussion Paper 260, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Ansgar Rannenberg, 2012. "Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics," Working Paper Research 224, National Bank of Belgium.
  4. Walentin, Karl, 2013. "Business Cycle Implications of Mortgage Spreads," Working Paper Series 275, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
  5. Stracca, Livio, 2013. "Financial imbalances and household welfare: empirical evidence from the EU," Working Paper Series 1543, European Central Bank.
  6. Finlay, Richard & Jääskelä, Jarkko P., 2014. "Credit supply shocks and the global financial crisis in three small open economies," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 270-276.
  7. Stracca, Livio, 2014. "Financial imbalances and household welfare: Empirical evidence from the EU," Journal of Financial Stability, Elsevier, vol. 11(C), pages 82-91.
  8. Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," Working Papers w201311, Banco de Portugal, Economics and Research Department.

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