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Dynamic effects of credit shocks in a data-rich environment

  • Boivin, Jean

    (BlackRock)

  • Giannoni, Marc

    (Federal Reserve Bank of New York)

  • Stevanovic, Dalibor

    (Université du Québec à Montréal)

We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. An identified credit shock resulting in an unanticipated increase in credit spreads causes a large and persistent downturn in indicators of real economic activity, labor market conditions, expectations of future economic conditions, a gradual decline in aggregate price indices, and a decrease in short- and longer-term riskless interest rates. Our identification procedure, which imposes restrictions on the response of a small number of economic indicators, yields interpretable estimated factors, and allows us to perform counterfactual experiments. Such an experiment suggests that credit spread shocks have largely contributed to the deterioration in economic conditions during the Great Recession.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 615.

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Length: 53 pages
Date of creation: 2013
Date of revision: 01 Oct 2016
Handle: RePEc:fip:fednsr:615
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