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Financial stress, regime switching and macrodynamics: Theory and empirics for the US, the EU and non-EU countries


  • Semmler, Willi
  • Chen, Pu


Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper the authors study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent impacts on the real side of the economy whereas in regimes of low stress, shocks can easily dissipate having no lasting effects. In order to study the macroeconomic dynamics, with alternative paths resulting from financial stress shocks, the authors introduce a macromodel with a finance-macro link which uses a multi-period decision framework of economic agents. The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically the authors use a multi-regime VAR (MRVAR) to study the impact of financial stress shocks on the macroeconomy in a large number of countries.

Suggested Citation

  • Semmler, Willi & Chen, Pu, 2014. "Financial stress, regime switching and macrodynamics: Theory and empirics for the US, the EU and non-EU countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-42.
  • Handle: RePEc:zbw:ifweej:201420

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    References listed on IDEAS

    1. 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.
    2. Paul De Grauwe, 2012. "The Governance of a Fragile Eurozone," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(3), pages 255-268, September.
    3. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    4. Francisco Roch & Harald Uhlig, 2016. "The Dynamics of Sovereign Debt Crises and Bailouts," IMF Working Papers 16/136, International Monetary Fund.
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    Cited by:

    1. Schleer, Frauke & Semmler, Willi, 2015. "Financial sector and output dynamics in the euro area: Non-linearities reconsidered," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 235-263.
    2. Pu Chen & Willi Semmler, 2017. "Financial Stress, Regime Switching and Spillover Effects: Evidence from a Multi-Regime Global VAR Model," Working Papers 1708, New School for Social Research, Department of Economics.
    3. Semmler, Willi & Haider, Alexander, 2015. "The perils of debt deflation in the euro area: A multi regime model," ZEW Discussion Papers 15-071, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. Donal Smith, 2016. "The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach," Discussion Papers 16/07, Department of Economics, University of York.
    5. Willi Semmler & Alexander Haider, 2016. "The perils of debt deflation in the Euro area: a multi regime model," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 257-278, May.

    More about this item


    Financial Stress; Macro dynamics; MRVAR;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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