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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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File URL: http://www.dnb.nl/binaries/wo0651_tcm46-145954.pdf
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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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Web page: http://www.dnb.nl/en/

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  1. 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.
  2. Mellander, Erik & Vredin, A & Warne, A, 1992. "Stochastic Trends and Economic Fluctuations in a Small Open Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 369-94, Oct.-Dec..
  3. Carlo C. A. Winder & Martin M. G. Fase, 1998. "Wealth and the demand for money in the European union," Empirical Economics, Springer, vol. 23(3), pages 507-524.
  4. 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.
  5. P.J.G. Vlaar & H. Schuberth, 1998. "Monetary transmission and controllability of money in Europe: a structural vector error correction approach," WO Research Memoranda (discontinued) 544, Netherlands Central Bank, Research Department.
  6. P.J.G. Vlaar, 1998. "On the asymptotic distribution of impulse response functions with long run restrictions," WO Research Memoranda (discontinued) 539, Netherlands Central Bank, Research Department.
  7. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  8. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  9. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  10. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the Flow of Funds," Working Paper Series, Macroeconomic Issues 94-2, Federal Reserve Bank of Chicago.
  11. 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.
  12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  13. Gali, Jordi, 1992. "How Well Does the IS-LM Model Fit Postwar U.S. Data," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 709-38, May.
  14. Stefan Gerlach & Frank Smets, 1995. "The monetary transmission mechanism: Evidence from the G-7 countries," BIS Working Papers 26, Bank for International Settlements.
  15. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  16. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
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