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Private sector balance, financial markets, and U.S. cycle: A SVAR analysis

Author

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  • Casadio, Paolo
  • Paradiso, Antonio

Abstract

Purpose – Considering the sectoral balance approach of Godley, and focusing only on the two main components of the private sector balance for the U.S. economy (household and non-financial corporate balance), we investigate the relationship between these two sectors, the financial variables, and economic cycle. In particular, we consider all these relationships endogenously. Design/methodology/approach – We estimate a structural VAR model between household and (non-financial) corporate financial balances, financial markets, and economic cycle and we perform an impulse response analysis. All the variables are expressed as cyclical components applying the Hodrick-Prescott filter. Findings - The main result is that: (1) household and corporate balances react to financial markets in the way we expected and discussed; (2) the economic cycle influences the two financial balances; (3) the corporate balance has a positive impact on the cycle; (4) the economic cycle and financial balances influence the financial variables. In particular, point (3) shows that the corporate balance is a leading component of the cycle as suggested by Casadio and Paradiso (2009) and accords with Minsky’s theory of financial instability. Research limitations/implications – The analysis does not include the foreign sector (current-account balance). Originality/value – Our contribution is an important step forward with respect to the two main contributions in literature which use this approach: the Levy Institute macroeconomic team and Goldman Sachs. Methodologically their models are based on some assumptions (such as exogeneity or market clearing price mechanism for the financial markets) which we overcome considering all the relationships studied in an endogenous manner.

Suggested Citation

  • Casadio, Paolo & Paradiso, Antonio, 2010. "Private sector balance, financial markets, and U.S. cycle: A SVAR analysis," MPRA Paper 28105, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28105
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    File URL: https://mpra.ub.uni-muenchen.de/28105/1/MPRA_paper_28105.pdf
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    References listed on IDEAS

    as
    1. Gennaro Zezza, 2009. "Fiscal policy and the economics of financial balances," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 6(2), pages 289-310.
    2. Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2009. "Sustaining Recovery--Medium-term Prospects and Policies for the U.S. Economy," Economics Strategic Analysis Archive sa_dec_09, Levy Economics Institute.
    3. Paolo Casadio & Antonio Paradiso, 2009. "A Financial Sector Balance Approach and the Cyclical Dynamics of the U.S. Economy," Economics Working Paper Archive wp_576, Levy Economics Institute.
    4. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, June.
    5. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    6. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
    7. Wynne Godley & Dimitri B. Papadimitriou & Greg Hannsgen & Gennaro Zezza, 2007. "The U.S. Economy: Is There a Way Out of the Woods?," Economics Strategic Analysis Archive sa_nov_07, Levy Economics Institute.
    8. Wynne Godley, 1999. "Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World," Economics Strategic Analysis Archive 99-10, Levy Economics Institute.
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    Cited by:

    1. Stefan Behrendt, 2014. "The Fiscal Compact and Current Account Patterns in Europe," Global Financial Markets Working Paper Series 2014-52, Friedrich-Schiller-University Jena.

    More about this item

    Keywords

    Household financial balance; Corporate financial balance; Business cycle; Financial markets; SVAR;

    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
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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