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Financial Conditions for the US: Aggregate Supply or Aggregate Demand Shocks?

Author

Listed:
  • Alessia Paccagnini
  • Fabio Parla

Abstract

It depends. We reply to this question by providing novel empirical evidence about the US economy. We identify the impact of financial high-frequency shocks on macroeconomic variables by estimating mixed- and common frequency VARs. The results from the mixed-frequency VAR show that economic output and inflation move in opposite directions in response to detrimental financial conditions, mimicking negative aggregate supply shocks. Oppositely, the results from the common-frequency VAR show that worsening financial conditions lead to a drop in output and inflation (and in the monetary policy rate), resembling negative aggregate demand shocks.

Suggested Citation

  • Alessia Paccagnini & Fabio Parla, 2023. "Financial Conditions for the US: Aggregate Supply or Aggregate Demand Shocks?," CAMA Working Papers 2023-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-10
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-02/10_2023_paccagnini_parla_0.pdf
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    More about this item

    Keywords

    Financial Conditions; High-Frequency; Shock Identification; Mixed-Frequency VAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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