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The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation

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  • Tomas Adam
  • Miroslav Plasil

Abstract

This paper investigates empirically to what extent financial variables can explain macroeconomic developments in the Czech Republic and how the results are sensitive to some (usually reasonable or routinely made) modeling choices. To this end, the dynamic model averaging/selection framework is applied to a universe of (potentially large) time-varying parameter VAR models, which allows one to assess the explanatory power of financial variables at each point in time. Based on a set of 27 competing models and an extensive ensemble of alternative specifications of those models, we find that financial variables were particularly relevant in explaining developments in the lead-up to and during economic downturns. By contrast, in tranquil times, models containing only traditional macroeconomic variables explained macroeconomic dynamics reasonably well. Within the broad set of financial variables considered, credit to the private sector, bank profitability, and leverage seem to be among the most relevant indicators.

Suggested Citation

  • Tomas Adam & Miroslav Plasil, 2014. "The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation," Working Papers 2014/11, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2014/11
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    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2014_11.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2003. "Do financial variables help forecasting inflation and real activity in the euro area?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1243-1255, September.
    3. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
    4. Koop, Gary & Korobilis, Dimitris, 2014. "A new index of financial conditions," European Economic Review, Elsevier, vol. 71(C), pages 101-116.
    5. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    6. James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.
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    8. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-254.
    9. Tomas Adam & Sona Benecka, 2013. "Financial Stress Spillover and Financial Linkages between the Euro Area and the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 46-64, March.
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    More about this item

    Keywords

    Dynamic model averaging; macro-financial linkages; vector autoregression;

    JEL classification:

    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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