Corporate Credit, Stock Price Inflation and Economic Fluctuations
AbstractWe analyze in this paper the empirical interaction between real corporate credit, real income, real stock prices, the short-term interest rate and inflation for the Netherlands and the United States. The framework is based on a five-variable vector error correction model with economically based restrictions upon the cointegrating vectors. Structure is imposed on the vector error correction model in order to identify the permanent and temporary shocks within the system and we use impulse response functions and forecast error variance decompositions to analyze the interdependencies between the aforementioned variables. Erratic shocks in the real amount of corporate credit and in stock prices could potentially have some impact on inflation in the case of United States and on real output in the Netherlands. However, our structural VAR analysis also shows that the above mentioned erratic shocks only explain a small proportion of the variation in inflation and economic activity, and inflation objective shifts and supply side shocks are much more important determinants for economic fluctuations.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 651.
Date of creation: 2001
Date of revision:
Corporate credit; stock prices; vector error correction models; impulse response functions.;
Other versions of this item:
- Jan Groen, 2004. "Corporate credit, stock price inflation and economic fluctuations," Applied Economics, Taylor & Francis Journals, vol. 36(18), pages 1995-2006.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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