Macro-Financial Linkages: Evidence from Country-Specific VARs

37 Pages Posted: 4 Apr 2012

See all articles by Paolo Guarda

Paolo Guarda

Banque Centrale du Luxembourg

Philippe Jeanfils

National Bank of Belgium

Date Written: March 2012


This paper estimates the contribution of financial shocks to fluctuations in the real economy by augmenting the standard macroeconomic vector autoregression (VAR) with five financial variables (real stock prices, real house prices, term spread, loans-to-GDP ratio and loans-to-deposits ratio). This VAR is estimated separately for 19 industrialised countries over 1980Q1-2010Q4 using three alternative measures of economic activity: GDP, private consumption or total investment. Financial shocks are identified by imposing a recursive structure (Choleski decomposition). Several results stand out. First, the effect of financial shocks on the real economy is fairly heterogeneous across countries, confirming previous findings in the literature. Second, the five financial shocks provide a surprisingly large contribution to explaining real fluctuations (33% of GDP variance at the 3-year horizon on average across countries) exceeding the contribution from monetary policy shocks. Third, the most important source of real fluctuations appears to be shocks to asset prices (real stock prices account for 12% of GDP variance and real house prices for 9%). Shocks to the term spread or to leverage (credit-to-GDP ratio or loans-to-deposits ratio) each contribute an additional 3-4% of GDP variance. Fourth, the combined contribution of the five financial shocks is usually higher for fluctuations in investment than in private consumption. Fifth, historical decompositions indicate that financial shocks provide much more important contributions to output fluctuations during episodes associated with financial imbalances (both booms and busts). This suggests possible time-variation or non-linearities in macrofinancial linkages that are left for future research.

Keywords: asset prices, autoregression, business cycle, credit, financial shock

JEL Classification: C32, E32, E44, E51

Suggested Citation

Guarda, Paolo and Jeanfils, Philippe, Macro-Financial Linkages: Evidence from Country-Specific VARs (March 2012). CEPR Discussion Paper No. DP8875, Available at SSRN:

Paolo Guarda (Contact Author)

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983

Philippe Jeanfils

National Bank of Belgium ( email )

Brussels, B-1000

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