Exploring the Effects of Financial and Fiscal Vulnerabilities on G7 Economies: Evidence from SVAR Analysis
55 Pages Posted: 27 Aug 2014 Last revised: 18 May 2016
Date Written: September 1, 2014
We examine the possible interactions of the financial cycle and fiscal position for G7 economies. We employ the innovative aggregate financial and fiscal stress indexes which are able to depict the perplexed nature of modern economies. A SVAR model is developed to investigate the effects of both financial and fiscal stress on key macroeconomic variables. The results, using two different identification methods, reveal that financial and fiscal shocks affect negatively the key macroeconomic variables. Additionally, there is a weak feedback effect from a financial shock to fiscal sector and vice versa.
Keywords: Financial stress; Fiscal stress; Structural VAR; G7 economies
JEL Classification: E44, F47, G01
Suggested Citation: Suggested Citation