What Does a Financial Shock Do? First International Evidence

42 Pages Posted: 6 Mar 2013

See all articles by Fabio Fornari

Fabio Fornari

European Central Bank (ECB)

Livio Stracca

European Central Bank (ECB)

Date Written: March 2013

Abstract

In this paper we attempt to evaluate the quantitative impact of financial shocks on key indicators of real activity and financial conditions. We focus on financial shocks as they have received wide attention in the recent literature and in the policy debate after the global financial crisis. We estimate a panel VAR for 21 advanced economies based on quarterly data between 1985 and 2011, where financial shocks are identified through sign restrictions. Overall, we find robust evidence that financial shocks can be separately identified from other shock types and that they exert a significant influence on key macroeconomic variables such as GDP and (particularly) investment, but it is unclear whether these shocks are demand or supply shocks from the standpoint of their macroeconomic impact. The financial development and the financial structure of a given country are found not to matter much for the intensity of the propagation of financial shocks. Moreover, we generally find that these shocks play a role not only in crisis times, but also in normal conditions. Finally, we discuss the implications of our findings for monetary policy.

Keywords: financial shocks, VAR, identification, stochastic pooling, leverage, credit

JEL Classification: E44, E52, E58, G20

Suggested Citation

Fornari, Fabio and Stracca, Livio, What Does a Financial Shock Do? First International Evidence (March 2013). ECB Working Paper No. 1522, Available at SSRN: https://ssrn.com/abstract=2224062 or http://dx.doi.org/10.2139/ssrn.2224062

Fabio Fornari (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Livio Stracca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

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