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A macroeconomic investigation of funding liquidity and monetary policy shocks in the United States

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  • Ching-Wai (Jeremy) Chiu

Abstract

This article provides empirical evidence that aggregate funding liquidity shocks and monetary policy shocks contribute to the business cycles in the United States. I estimate a structural VAR model with monthly macro-financial data, and identify the structural shocks based on the recursiveness assumption. Both adverse funding liquidity and monetary policy shocks, which are orthogonal to each other by construction, cause significant recessions, with monetary policy shocks generating relatively deeper and longer recessionary effects. Only funding liquidity shocks significantly reduce market liquidity. These two shocks account for over 30% of the cyclical fluctuations of the unemployment rate and industrial production two years after the shocks hit.

Suggested Citation

  • Ching-Wai (Jeremy) Chiu, 2014. "A macroeconomic investigation of funding liquidity and monetary policy shocks in the United States," Applied Economics Letters, Taylor & Francis Journals, vol. 21(8), pages 517-521, May.
    • Handle: RePEc:taf:apeclt:v:21:y:2014:i:8:p:517-521
    DOI: 10.1080/13504851.2013.870646
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    References listed on IDEAS

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    1. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    2. Gilchrist, Simon & Yankov, Vladimir & Zakrajsek, Egon, 2009. "Credit market shocks and economic fluctuations: Evidence from corporate bond and stock markets," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 471-493, May.
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    Cited by:

    1. Cheng, Chak Hung Jack & Chiu, Ching-Wai (Jeremy) & Hankins, William B. & Stone, Anna-Leigh, 2018. "Partisan conflict, policy uncertainty and aggregate corporate cash holdings," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 78-90.
    2. Renato Faccini & Eirini Konstantinidi & George Skiadopoulos & Sylvia Sarantopoulou-Chiourea, 2019. "A New Predictor of U.S. Real Economic Activity: The S&P 500 Option Implied Risk Aversion," Management Science, INFORMS, vol. 65(10), pages 4927-4949, October.

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