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Deflationary Financial Shocks and Inflationary Uncertainty Shocks: An SVAR Investigation

Author

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  • Roberto A. De Santis
  • Wouter Van der Veken

Abstract

What are the economic implications of financial and uncertainty shocks? Financial shocks reduce both output and goods prices, while uncertainty shocks reduce output but raise goods prices. In response to uncertainty shocks, firms increase markups, in line with the theory of self‐insurance against being stuck with too low a price. This explains why goods prices may increase at the onset of a recession and why recessions feature less pronounced deflationary pressures. Both shocks are jointly identified exclusively using restrictions on their contribution to the forecast error of a selected variable at the dates of well‐understood economic events. The restricted shock must be the largest contributor to the forecast error, but only among shocks that move the forecast error in the same direction.

Suggested Citation

  • Roberto A. De Santis & Wouter Van der Veken, 2026. "Deflationary Financial Shocks and Inflationary Uncertainty Shocks: An SVAR Investigation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 88(1), pages 157-171, February.
  • Handle: RePEc:bla:obuest:v:88:y:2026:i:1:p:157-171
    DOI: 10.1111/obes.70010
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    2. Beckmann, Joscha & Czudaj, Robert L., 2026. "Uncertainty shocks and inflation: The role of credibility and expectation anchoring," Journal of International Money and Finance, Elsevier, vol. 160(C).
    3. Brignone, Davide & Gambetti, Luca & Ricci, Martino, 2024. "Geopolitical risk shocks: when size matters," Working Paper Series 2972, European Central Bank.
    4. Lenin Arango-Castillo & María José Orraca & Regina Briseño, 2025. "Inflation volatility across advanced and emerging economies during the COVID-19 pandemic," Working Papers 2025-13, Banco de México.
    5. Koivisto, Tero, 2024. "Asset price shocks and inflation in the Finnish economy," BoF Economics Review 6/2024, Bank of Finland.
    6. Szafranek, Karol & Szafrański, Grzegorz & Leszczyńska-Paczesna, Agnieszka, 2024. "Inflation returns. Revisiting the role of external and domestic shocks with Bayesian structural VAR," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 789-810.
    7. Nicholas Apergis, 2024. "Eurozone inflation: fresh projections from global factors," Economics and Business Letters, Oviedo University Press, vol. 13(1), pages 39-47.
    8. Zabavnik, Darja & Verbič, Miroslav, 2025. "Revisiting the impact of financial shocks on the fiscal position of euro area countries," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 622-635.
    9. Jean-Charles Bricongne & Baptiste Meunier & Raquel Caldeira, 2024. "Should Central Banks Care About Text Mining? A Literature Review," Working papers 950, Banque de France.
    10. Abhishek KUMAR & Apra SINHA & Gazi Salah UDDIN, 2025. "Revenue and Cost Uncertainties and Market Power," Working Papers DP-2024-37, Economic Research Institute for ASEAN and East Asia (ERIA).
    11. De Santis, Roberto A. & Tornese, Tommaso, 2025. "Macroeconomic regime change and the size of supply chain disruption and energy supply shocks," European Economic Review, Elsevier, vol. 178(C).
    12. Carlos Cañizares Martínez & Arne Gieseck, 2025. "The effects of macro uncertainty shocks in the euro area: a FAVAR approach," Empirical Economics, Springer, vol. 68(6), pages 2829-2872, June.
    13. Hamdi Jbir, 2025. "Does financial stability communication affect financial asset prices? Evidence from the Bank of England's communication experiment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 1831-1855, April.
    14. De Santis, Roberto A. & Tornese, Tommaso, 2025. "Energy supply shocks’ nonlinearities on output and prices," European Economic Review, Elsevier, vol. 176(C).
    15. Carboni, Giacomo & Fonseca, Luís & Fornari, Fabio & Urrutia, Leonardo, 2026. "Structural drivers of growth at risk: insights from a VAR-quantile regression approach," Working Paper Series 3171, European Central Bank.
    16. Berthold, Brendan, 2023. "The macroeconomic effects of uncertainty and risk aversion shocks," European Economic Review, Elsevier, vol. 154(C).
    17. Jbir, Hamdi, 2024. "Impact of monetary and macroprudential policy shocks on systemic risk: what role for the central bank governance ?," MPRA Paper 125437, University Library of Munich, Germany, revised 2025.

    More about this item

    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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