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On the Relationship between Financial Instability and Economic Performance: Stressing the Business of Nonlinear Modelling

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  • Ubilava, David

Abstract

The recent global financial crisis and the subsequent economic recession have revitalized the discussion on the causal relationship between financial and economic sectors. This study examines financial and economic indices developed by the Federal Reserve Banks of Kansas City and Chicago, respectively, to identify the impact of financial uncertainty on the overall economic performance. Using smooth transition and vector smooth transition autoregressions, this research assesses nonlinear dynamics of these indices, and tests the Granger non-causality hypothesis between the financial stress and economic activity in an out-of-sample setting. Results of this study confirm the causal relationship between financial and economic indices. Moreover, the improved in-sample fit of nonlinear models translates into better forecast performance, in comparison with the linear models, in an out-of-sample setting as well.

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  • Ubilava, David, 2014. "On the Relationship between Financial Instability and Economic Performance: Stressing the Business of Nonlinear Modelling," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170222, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea14:170222
    DOI: 10.22004/ag.econ.170222
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    Cited by:

    1. Ngene, Geoffrey M. & Tah, Kenneth A., 2023. "How are policy uncertainty, real economy, and financial sector connected?," Economic Modelling, Elsevier, vol. 123(C).
    2. Turuntseva, M. & Zyamalov, V., 2016. "Stock Markets under the Changing Terms of Trade," Journal of the New Economic Association, New Economic Association, vol. 31(3), pages 93-109.
    3. Vadim Ye. Zyamalov, 2022. "Applying the Multi Regime Models to the Modelling the Dynamics of Financial Time Series [Использование Многорежимных Моделей Для Моделирования Динамики Финансовых Временных Рядов]," Russian Economic Development, Gaidar Institute for Economic Policy, issue 5, pages 13-19, May.
    4. Vadim Ye. Zyamalov, 2022. "Использование Многорежимных Моделей Для Моделирования Динамики Финансовых Временных Рядов," Russian Economic Development (in Russian), Gaidar Institute for Economic Policy, issue 5, pages 13-19, May.

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