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Financial intermediaries’ instability and euro area macroeconomic dynamics

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  • Lhuissier, Stéphane

Abstract

Fitting a Markov-switching structural vector autoregression to euro area data, we show that, after taking into account heteroskedasticity, the differences in the behavior of the economy between tranquil and financial distress periods (e.g., Great Recession and sovereign debt crisis) reflect variations in the transmission mechanism. When and only when a period of financial distress occurs, disruptions in financial intermediation trigger adverse effects for the real economy and turn out to be the primary source of business cycle fluctuations. Finally, we provide strong evidence that ECB interventions in the financial sector had beneficial effects on the real economy during the sovereign debt crisis.

Suggested Citation

  • Lhuissier, Stéphane, 2017. "Financial intermediaries’ instability and euro area macroeconomic dynamics," European Economic Review, Elsevier, vol. 98(C), pages 49-72.
  • Handle: RePEc:eee:eecrev:v:98:y:2017:i:c:p:49-72
    DOI: 10.1016/j.euroecorev.2017.06.004
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    More about this item

    Keywords

    Macro-financial linkages; Financial intermediation; Euro Area business cycles; Markov-switching structural Bayesian VARs;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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

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