Alessandri, P. and Mumtaz, H. (2014) Financial regimes and uncertainty shocks. Working Paper. Birkbeck, University of London, London, UK.
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Abstract
Financial markets are central to the transmission of uncertainty shocks. This paper documents a new aspect of the interaction between the two by showing that uncertainty shocks have radically di¤erent macroeconomic implications depending on the state finan- cial markets are in when they occur. Using monthly US data, we estimate a nonlinear VAR where economic uncertainty is proxied by the (unobserved) volatility of the struc- tural shocks, and a regime change occurs whenever credit conditions cross a critical threshold. An exogenous increase in uncertainty has recessionary e¤ects in both good and bad credit regimes, but its impact on output is estimated to be five times larger when the economy is experiencing financial distress. Accounting for this nonlinearity, uncertainty accounts for about 1% of the peak fall in industrial production observed in the 2007-2009 recession.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Additional Information: | BCAM 1404; ISSN 1745-8587 |
| Keyword(s) / Subject(s): | Uncertainty, Stochastic Volatility, Financial Markets, Threshold VAR |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Research Centres and Institutes: | Applied Macroeconomics, Birkbeck Centre for |
| Depositing User: | Administrator |
| Date Deposited: | 21 Mar 2019 16:14 |
| Last Modified: | 02 Aug 2023 17:49 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/26589 |
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