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Corporate Credit, Stock Price Inflation and Economic Fluctuations

  • J.J.J. Groen

We analyze in this paper the empirical interaction between real corporate credit, real income, real stock prices, the short-term interest rate and inflation for the Netherlands and the United States. The framework is based on a five-variable vector error correction model with economically based restrictions upon the cointegrating vectors. Structure is imposed on the vector error correction model in order to identify the permanent and temporary shocks within the system and we use impulse response functions and forecast error variance decompositions to analyze the interdependencies between the aforementioned variables. Erratic shocks in the real amount of corporate credit and in stock prices could potentially have some impact on inflation in the case of United States and on real output in the Netherlands. However, our structural VAR analysis also shows that the above mentioned erratic shocks only explain a small proportion of the variation in inflation and economic activity, and inflation objective shifts and supply side shocks are much more important determinants for economic fluctuations.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 651.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:651
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  1. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
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  7. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
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  9. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
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  12. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
  13. Vlaar, Peter J.G., 2004. "On The Asymptotic Distribution Of Impulse Response Functions With Long-Run Restrictions," Econometric Theory, Cambridge University Press, vol. 20(05), pages 891-903, October.
  14. P.J.G. Vlaar & H. Schuberth, 1999. "Monetary Transmission and Controllability of Money in Europe: aStructural Vector Error Correction Approach," DNB Staff Reports (discontinued) 36, Netherlands Central Bank.
  15. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  16. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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