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Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions

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  • Barnichon, Regis

    (Federal Reserve Bank of San Francisco)

  • Matthes, Christian

    (Federal Reserve Bank of Richmond)

  • Ziegenbein, Alexander

    (Universitat Pompu Fabra)

Abstract

An important, yet untested, prediction of many macro models with financial frictions is that financial market disruptions can have highly nonlinear effects on economic activity. This paper presents empirical evidence supporting this prediction, and in particular that financial shocks have substantial (i) asymmetric and (ii) state dependent effects. First, negative shocks to credit supply have large and persistent effects on output, but positive shocks have no significant effect. Second, credit supply shocks have larger and more persistent effects in periods of weak economic growth.

Suggested Citation

  • Barnichon, Regis & Matthes, Christian & Ziegenbein, Alexander, 2016. "Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions," Working Paper 16-15, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:16-15
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