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Macro-financial linkages: Evidence from country-specific VARs

  • Paolo Guarda

    ()

  • Philippe Jeanfils

    ()

This paper estimates the contribution of financial shocks to fluctuations in the real economy by augmenting the standard macroeconomic vector autoregression (VAR) with five financial variables (real stock prices, real house prices, term spread, loans-to-GDP ratio and loans-todeposits ratio). This VAR is estimated separately for 19 industrialised countries over 1980Q1-2010Q4 using three alternative measures of economic activity: GDP, private consumption or total investment. Financial shocks are identified by imposing a recursive structure (Choleski decomposition). Several results stand out. First, the effect of financial shocks on the real economy is fairly heterogeneous across countries, confirming previous findings in the literature. Second, the five financial shocks provide a surprisingly large contribution to explaining real fluctuations (33% of GDP variance at the 3-year horizon on average across countries) exceeding the contribution from monetary policy shocks. Third, the most important source of real fluctuations appears to be shocks to asset prices (real stock prices account for 12% of GDP variance and real house prices for 9%). Shocks to the term spread or to leverage (credit-to-GDP ratio or loans-to-deposits ratio) each contribute an additional 3-4% of GDP variance. Fourth, the combined contribution of the five financial shocks is usually higher for fluctuations in investment than in private consumption. Fifth, historical decompositions indicate that financial shocks provide much more important contributions to output fluctuations during episodes associated with financial imbalances (both booms and busts). This suggests possible time-variation or non-linearities in macrofinancial linkages that are left for future research.

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File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/71/BCLWP071.pdf
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Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 71.

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Length: 38 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:bcl:bclwop:bclwp071
Contact details of provider: Web page: http://www.bcl.lu/

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  1. Robert S. Chirinko & Leo de Haan & Elmer Sterken, 2008. "Asset Price Shocks, Real Expenditures, and Financial Structure: A Multi-Country Analysis," CESifo Working Paper Series 2342, CESifo Group Munich.
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  9. Alessandro Calza & Tommaso Monacelli & Livio Stracca, 2013. "Housing Finance And Monetary Policy," Journal of the European Economic Association, European Economic Association, vol. 11, pages 101-122, 01.
  10. Gerlach, Stefan & Assenmacher-Wesche, Katrin, 2008. "Financial structure and the impact of monetary policy on asset prices," CFS Working Paper Series 2008/30, Center for Financial Studies (CFS).
  11. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  12. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
  13. Fabio Canova & Evi Pappa, 2003. "Price differentials in monetary unions: The role of fiscal shocks," Economics Working Papers 923, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2005.
  14. Stefano Neri, 2004. "Monetary policy and stock prices: theory and evidence," Temi di discussione (Economic working papers) 513, Bank of Italy, Economic Research and International Relations Area.
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