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    Financial regimes and uncertainty shocks

    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 Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Administrator
    Date Deposited: 21 Mar 2019 16:14
    Last Modified: 26 Jul 2019 22:22
    URI: http://eprints.bbk.ac.uk/id/eprint/26589

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