The real consequences of financial stress
We introduce a dynamic banking-macro model, which abstains from conventional mean-reversion assumptions and in which—similar to Brunnermeier and Sannikov (2010)—adverse asset-price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector. To assess such phenomena empirically, we employ a multi-regime vector autoregression (MRVAR) approach rather than conventional linear vector autoregressions. We conduct bivariate empirical analyses, using country-specific financial-stress indices and industrial production, for the U.S., the UK and the four large euro-area countries. Our MRVAR-based impulse-response studies demonstrate that, compared to a linear specification, response profiles are dependent on the current state of the economy as well as the sign and size of shocks. Previous multi-regime-based studies, focusing solely on the regime-dependence of responses, conclude that, during a high-stress period, stress-increasing shocks have more dramatic consequences for economic activity than during low stress. Conducting size-dependent response analysis, we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches. Our findings also suggest that, in states of high financial stress, large negative shocks to financial-stress have sizeable positive effects on real activity and support the idea of “unconventional” monetary policy measures in cases of extreme financial stress.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 37 (2013)
Issue (Month): 8 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/jedc|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- van Roye, Björn, 2011. "Financial stress and economic activity in Germany and the Euro Area," Kiel Working Papers 1743, Kiel Institute for the World Economy (IfW).
- Willi Semmler & Lucas Bernard, 2011.
"Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices,"
DEGIT Conference Papers
c016_034, DEGIT, Dynamics, Economic Growth, and International Trade.
- Semmler, Willi & Bernard, Lucas, 2012. "Boom–bust cycles: Leveraging, complex securities, and asset prices," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 442-465.
- Lasse Heje Pederson & Markus K Brunnermeier, 2007.
"Market Liquidity and Funding Liquidity,"
FMG Discussion Papers
dp580, Financial Markets Group.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007. "Market Liquidity and Funding Liquidity," CEPR Discussion Papers 6179, C.E.P.R. Discussion Papers.
- Grune, Lars & Semmler, Willi, 2004. "Using dynamic programming with adaptive grid scheme for optimal control problems in economics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2427-2456, December.
- Zhiguo He & Arvind Krishnamurthy, 2008. "Intermediary Asset Pricing," NBER Working Papers 14517, National Bureau of Economic Research, Inc.
- Ernst, Ekkehard & Semmler, Willi, 2010. "Global dynamics in a model with search and matching in labor and capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1651-1679, September.
- Jokipii, Terhi & Monnin, Pierre, 2013.
"The impact of banking sector stability on the real economy,"
Journal of International Money and Finance,
Elsevier, vol. 32(C), pages 1-16.
- Pierre Monnin & Terhi Jokipii, 2010. "The Impact of Banking Sector Stability on the Real Economy," Working Papers 2010-05, Swiss National Bank.
- Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2001.
"Regime-dependent impulse response functions in a Markov-switching vector autoregression model,"
Research Discussion Papers
11/2001, Bank of Finland.
- Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2003. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Economics Letters, Elsevier, vol. 78(3), pages 295-299, March.
- Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
- John H. Cochrane, 2011. "Presidential Address: Discount Rates," Journal of Finance, American Finance Association, vol. 66(4), pages 1047-1108, 08.
- Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009.
"This Time Is Different: Eight Centuries of Financial Folly,"
Princeton University Press,
edition 1, number 8973.
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
NBER Working Papers
6455, National Bureau of Economic Research, Inc.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
- Charles Nolan & Christoph Thoenissen, 2008.
"Financial shocks and the US business cycle,"
CDMA Working Paper Series
200810, Centre for Dynamic Macroeconomic Analysis.
- Holló, Dániel & Kremer, Manfred & Lo Duca, Marco, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
- Bruce E. Hansen, 2000.
"Sample Splitting and Threshold Estimation,"
Econometric Society, vol. 68(3), pages 575-604, May.
- Gary B. Gorton, 2009.
"Information, Liquidity, and the (Ongoing) Panic of 2007,"
NBER Working Papers
14649, National Bureau of Economic Research, Inc.
- Gary Gorton, 2009. "Information, Liquidity, and the (Ongoing) Panic of 2007," American Economic Review, American Economic Association, vol. 99(2), pages 567-572, May.
- Mittnik, Stefan & Zadrozny, Peter A, 1993. "Asymptotic Distributions of Impulse Responses, Step Responses, and Variance Decompositions of Estimated Linear Dynamic Models," Econometrica, Econometric Society, vol. 61(4), pages 857-870, July.
- Robert W. Dimand, 2005. "Dimand on the Corridor of Stability," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 185-199, 01.
- Hubrich, Kirstin & Tetlow, Robert J., 2015.
"Financial stress and economic dynamics: The transmission of crises,"
Journal of Monetary Economics,
Elsevier, vol. 70(C), pages 100-115.
- Kirstin Hubrich & Robert J. Tetlow, 2012. "Financial stress and economic dynamics: the transmission of crises," Finance and Economics Discussion Series 2012-82, Board of Governors of the Federal Reserve System (U.S.).
- Hubrich, Kirstin & Tetlow, Robert J., 2014. "Financial stress and economic dynamics: the transmission of crises," Working Paper Series 1728, European Central Bank.
- Robert Tetlow & Kirstin Hubrich, 2013. "Financial stress and economic dynamics: The transmission of crises," 2013 Meeting Papers 571, Society for Economic Dynamics.
- Mallick, Sushanta K. & Sousa, Ricardo M., 2013.
"The real effects of financial stress in the Eurozone,"
International Review of Financial Analysis,
Elsevier, vol. 30(C), pages 1-17.
- Sushanta K. Mallick & Ricardo M. Sousa, 2011. "The real effects of financial stress in the Euro zone," NIPE Working Papers 12/2011, NIPE - Universidade do Minho.
- Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
- Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
- repec:ecb:ecbwps:20111426 is not listed on IDEAS
- Jerome L. Stein, 2011.
"The Diversity of Debt Crises in Europe,"
Cato Journal, Cato Institute, vol. 31(2), pages 199-215, Spring/Su.
- John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715R, Cowles Foundation for Research in Economics, Yale University, revised Jan 2010.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
- Vasco Cúrdia & Michael Woodford, 2009.
"Credit spreads and monetary policy,"
385, Federal Reserve Bank of New York.
- Kliesen, Kevin L. & Owyang, Michael T. & Vermann, E. Katarina, 2012. "Disentangling diverse measures: a survey of financial stress indexes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 369-398.
- Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
- repec:nys:sunysb:93-01 is not listed on IDEAS
- Bruce C. Greenwald & Joseph E. Stiglitz, 1993.
"Financial Market Imperfections and Business Cycles,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(1), pages 77-114.
- Bruce C. Greenwald & Joseph E. Stiglitz, 1988. "Financial Market Imperfections and Business Cycles," NBER Working Papers 2494, National Bureau of Economic Research, Inc.
- Troy A. Davig & Craig S. Hakkio, 2010. "What is the effect of financial stress on economic activity," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 35-62.
- Jesus Saurina, 2009. "Dynamic Provisioning," World Bank Other Operational Studies 10241, The World Bank.
- Simon Gilchrist & Egon Zakrajšek, 2011.
"Credit Spreads and Business Cycle Fluctuations,"
NBER Working Papers
17021, National Bureau of Economic Research, Inc.
- Mittnik, Stefan & Semmler, Willi, 2012. "Regime dependence of the fiscal multiplier," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 502-522.
- Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010.
"Macro risk premium and intermediary balance sheet quantities,"
428, Federal Reserve Bank of New York.
- Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Macro Risk Premium and Intermediary Balance Sheet Quantities," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(1), pages 179-207, August.
- John Geanakoplos, 2010. "The Leverage Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 1-65 National Bureau of Economic Research, Inc.
- Jan Hatzius & Peter Hooper & Frederic S. Mishkin & Kermit L. Schoenholtz & Mark W. Watson, 2010. "Financial Conditions Indexes: A Fresh Look after the Financial Crisis," NBER Working Papers 16150, National Bureau of Economic Research, Inc.
- Grüne, Lars & Semmler, Willi, 2008. "Asset pricing with loss aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3253-3274, October.
- Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
- Lars Grüne, 2005. "Default Risk, Asset Pricing, and Debt Control," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(1), pages 79-106.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:37:y:2013:i:8:p:1479-1499. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.