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Credit Market Imperfections and Business Cycle Dynamics: A Nonlinear Approach

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  • Atanasova Christina

    ()
    (Leeds University Business School)

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    Abstract

    Linear Vector Autoregression (VAR) models provide a useful starting point for analysing multivariate relationships between economic variables. They are frequently used for empirical macroeconomic modelling, policy analysis and forecasting. However, linear VAR systems fail to capture non-linear dynamics such as regime switching and asymmetric responses to shocks, suggested by the recent theoretical developments in macroeconomic research. In addition, an increasing body of empirical evidence suggests that the linear conditional expectations implied by standard VAR models do not always accord with the observed facts. For example, a significant number of empirical studies document asymmetries in the effects of monetary policy on output growth. This paper employs a more general nonlinear VAR methodology to re-examine previous findings that credit market conditions contribute to economic fluctuations as a propagator of shocks. Unlike linear projections it allows for nonlinear dynamics and asymmetric effects of shocks. We estimate a threshold vector autoregression (TVAR), in which the system's dynamics change back and forth between credit constrained and unconstrained regimes. Using generalised impulse response functions (GIRF) generated from the estimated nonlinear model, we examine the real effects of monetary policy. We find evidence of asymmetry in the effects of monetary policy in the credit constrained and unconstrained regimes as well as different output effects of monetary contractions and expansions.

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    File URL: http://www.degruyter.com/view/j/snde.2003.7.4/snde.2003.7.4.1112/snde.2003.7.4.1112.xml?format=INT
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    Bibliographic Info

    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 7 (2003)
    Issue (Month): 4 (December)
    Pages: 1-22

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    Handle: RePEc:bpj:sndecm:v:7:y:2003:i:4:n:5

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/snde

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    Cited by:
    1. Baum, Anja & Koester, Gerrit B., 2011. "The impact of fiscal policy on economic activity over the business cycle - evidence from a threshold VAR analysis," Discussion Paper Series 1: Economic Studies 2011,03, Deutsche Bundesbank, Research Centre.
    2. Juan de Dios Tena & A. R. Tremayne, 2006. "Modelling Monetary Transmission In Uk Manufacturing Industry," Statistics and Econometrics Working Papers ws062911, Universidad Carlos III, Departamento de Estadística y Econometría.
    3. Dobromil Serwa, 2008. "Larger crises cost more: impact of banking sector instability on output growth," Working Papers 25, Department of Applied Econometrics, Warsaw School of Economics.
    4. Kierzenkowski, R. & Oung, V., 2007. "L’évolution des crédits à l’habitat en France : une grille d’analyse en termes de cycles," Working papers 172, Banque de France.
    5. Hulsewig, Oliver & Mayer, Eric & Wollmershauser, Timo, 2006. "Bank loan supply and monetary policy transmission in Germany: An assessment based on matching impulse responses," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2893-2910, October.
    6. van Dijk, Dick & Hans Franses, Philip & Peter Boswijk, H., 2007. "Absorption of shocks in nonlinear autoregressive models," Computational Statistics & Data Analysis, Elsevier, vol. 51(9), pages 4206-4226, May.
    7. J. De Dios Tena & E. Otranto, 2008. "A Realistic Model for Official Interest Rates," Working Paper CRENoS 200802, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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