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On The Relationship Between Financial Instability And Economic Performance: Stressing The Business Of Nonlinear Modeling

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  • Ubilava, David

Abstract

The recent global financial crisis and the subsequent recession have revitalized the discussion on causal interactions between financial and economic sectors. In this study, I apply the financial stress and the national activity indices–respectively developed by Federal Reserve Banks of Kansas City and Chicago–to investigate the impact of financial uncertainty on an overall economic performance. I examine nonlinear dynamics in a vector smooth transition autoregressive framework, and illustrate regime-dependent asymmetries in the financial and economic indices using the generalized impulse-response functions. The results reveal more amplified dynamics during the stressed conditions. I further evaluate benefits of nonlinear modeling in an out-of-sample setting. The forecasting exercise brings out the important advantages that nonlinear modeling provides in the identification of the causal effect of financial instability on overall economic performance.

Suggested Citation

  • Ubilava, David, 2019. "On The Relationship Between Financial Instability And Economic Performance: Stressing The Business Of Nonlinear Modeling," Macroeconomic Dynamics, Cambridge University Press, vol. 23(1), pages 80-100, January.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:01:p:80-100_00
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    Cited by:

    1. Turuntseva, M. & Zyamalov, V., 2016. "Stock Markets under the Changing Terms of Trade," Journal of the New Economic Association, New Economic Association, vol. 31(3), pages 93-109.
    2. Ngene, Geoffrey M. & Tah, Kenneth A., 2023. "How are policy uncertainty, real economy, and financial sector connected?," Economic Modelling, Elsevier, vol. 123(C).
    3. Vadim Ye. Zyamalov, 2022. "Использование Многорежимных Моделей Для Моделирования Динамики Финансовых Временных Рядов," Russian Economic Development (in Russian), Gaidar Institute for Economic Policy, issue 5, pages 13-19, May.
    4. Vadim Ye. Zyamalov, 2022. "Applying the Multi Regime Models to the Modelling the Dynamics of Financial Time Series [Использование Многорежимных Моделей Для Моделирования Динамики Финансовых Временных Рядов]," Russian Economic Development, Gaidar Institute for Economic Policy, issue 5, pages 13-19, May.

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