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Macro-financial linkages: Evidence from country-specific VARs

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  • Paolo Guarda

    ()

  • Philippe Jeanfils

    ()

Abstract

This paper estimates the contribution of financial shocks to fluctuations in the real economy by augmenting the standard macroeconomic vector autoregression (VAR) with five financial variables (real stock prices, real house prices, term spread, loans-to-GDP ratio and loans-todeposits ratio). This VAR is estimated separately for 19 industrialised countries over 1980Q1-2010Q4 using three alternative measures of economic activity: GDP, private consumption or total investment. Financial shocks are identified by imposing a recursive structure (Choleski decomposition). Several results stand out. First, the effect of financial shocks on the real economy is fairly heterogeneous across countries, confirming previous findings in the literature. Second, the five financial shocks provide a surprisingly large contribution to explaining real fluctuations (33% of GDP variance at the 3-year horizon on average across countries) exceeding the contribution from monetary policy shocks. Third, the most important source of real fluctuations appears to be shocks to asset prices (real stock prices account for 12% of GDP variance and real house prices for 9%). Shocks to the term spread or to leverage (credit-to-GDP ratio or loans-to-deposits ratio) each contribute an additional 3-4% of GDP variance. Fourth, the combined contribution of the five financial shocks is usually higher for fluctuations in investment than in private consumption. Fifth, historical decompositions indicate that financial shocks provide much more important contributions to output fluctuations during episodes associated with financial imbalances (both booms and busts). This suggests possible time-variation or non-linearities in macrofinancial linkages that are left for future research.

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Bibliographic Info

Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 71.

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Length: 38 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:bcl:bclwop:bclwp071

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Web page: http://www.bcl.lu/

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Keywords: vector autoregression; business cycle; financial shock; asset prices; credit;

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  1. Goodhart, Charles & Hofmann, Boris, 2008. "House Prices, Money, Credit and the Macroeconomy," Working Paper Series, European Central Bank 0888, European Central Bank.
  2. Alberto Musso & Stefano Neri & Livio Stracca, 2011. "Housing, consumption and monetary policy: how different are the U.S. and the euro area?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 807, Bank of Italy, Economic Research and International Relations Area.
  3. Calza, Alessandro & Stracca, Livio & Monacelli, Tommaso, 2009. "Housing finance and monetary policy," Working Paper Series, European Central Bank 1069, European Central Bank.
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  7. Christiane Baumeister & Eveline Durinck & Gert Peersman, 2008. "Liquidity, inflation and asset prices in a time-varying framework for the euro area," Working Paper Research, National Bank of Belgium 142, National Bank of Belgium.
  8. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series, European Central Bank 0092, European Central Bank.
  9. Katrin Assenmacher-Wesche & Stefan Gerlach, 2008. "Financial Structure and the Impact of Monetary Policy on Asset Prices," Working Papers 2008-16, Swiss National Bank.
  10. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2009. "Business Cycles in the Euro Area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7124, C.E.P.R. Discussion Papers.
  11. Chirinko, Robert S. & Haan, Leo de & Sterken, Elmer, 2004. "Asset Price Shocks, Real Expenditures, and Financial Structure:A Multi-Country Analysis," CCSO Working Papers, University of Groningen, CCSO Centre for Economic Research 200411, University of Groningen, CCSO Centre for Economic Research.
  12. Stefano Neri, 2004. "Monetary policy and stock prices: theory and evidence," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 513, Bank of Italy, Economic Research and International Relations Area.
  13. Massimo Giuliodori, 2005. "The Role Of House Prices In The Monetary Transmission Mechanism Across European Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(4), pages 519-543, 09.
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