Financial Shocks and the Macroeconomy: Heterogeneity and Non-Linearities

71 Pages Posted: 12 Mar 2013

See all articles by Kirstin Hubrich

Kirstin Hubrich

Board of Governors of the Federal Reserve System

Antonello D'Agostino

European Stability Mechanism; Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Marianna Cervena

National Bank of Slovakia

Matteo Ciccarelli

European Central Bank (ECB)

Paolo Guarda

Banque Centrale du Luxembourg

Markus Haavio

Bank of Finland - Research

Philippe Jeanfils

National Bank of Belgium

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Eva Ortega

Bank of Spain, Research Department

Maria Teresa Valderrama

Österreichische Nationalbank - Department of Economics

Marianna Valentinyine Endresz

Magyar Nemzeti Bank

Date Written: January 7, 2013

Abstract

This paper analyses the transmission of financial shocks to the macroeconomy. The role of macro-financial linkages is investigated from an empirical perspective for the euro area as a whole, for individual euro area member countries and for other EU and OECD countries. The following key economic questions are addressed: 1) Which financial shocks have the largest impact on output over the full sample on average? 2) Are financial developments leading real activity? 3) Is there heterogeneity or a common pattern in macro-financial linkages across the euro area and do these linkages vary over time? 4) Do cross-country spillovers matter? 5) Is the transmission of financial shocks different during episodes of high stress than it is in normal times, i.e. is there evidence of non-linearities? In summary, it is found that real asset prices are significant leading indicators of real activity whereas the latter leads loan developments. Furthermore, evidence is presented that macro-financial linkages are heterogeneous across countries – despite persistent commonalities – and time-varying. Moreover, they differ between euro area and other countries. Results also indicate that cross-country spillovers matter. Finally, important non-linearities in the transmission of financial shocks are documented, as the evidence suggests that the transmission differs in episodes of high stress compared with normal times.

Keywords: macro-financial linkages, financial shocks, lead-lag relationships, heterogeneity, cross-country spillovers, non-linearities

JEL Classification: E 440, E320, C320

Suggested Citation

Hubrich, Kirstin and D'Agostino, Antonello and Cervena, Marianna and Ciccarelli, Matteo and Guarda, Paolo and Haavio, Markus and Jeanfils, Philippe and Mendicino, Caterina and Ortega, Eva and Valderrama, Maria Teresa and Valentinyine Endresz, Marianna, Financial Shocks and the Macroeconomy: Heterogeneity and Non-Linearities (January 7, 2013). ECB Occasional Paper No. 143. Available at SSRN: https://ssrn.com/abstract=2197230

Kirstin Hubrich (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Antonello D'Agostino

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Marianna Cervena

National Bank of Slovakia ( email )

Imricha Karvasa 1
813 25 Bratislava
Slovakia

Matteo Ciccarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paolo Guarda

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Philippe Jeanfils

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Eva Ortega

Bank of Spain, Research Department ( email )

Alcala 50
28014 Madrid
Spain

Maria Teresa Valderrama

Österreichische Nationalbank - Department of Economics ( email )

Vienna, 1010
Austria

Marianna Valentinyine Endresz

Magyar Nemzeti Bank ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

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