Financial Shocks and the Real Economy in a Nonlinear World: From Theory to Estimation

26 Pages Posted: 16 Jun 2015

Date Written: June 2015

Abstract

We examine the inter-linkages between financial factors and real economic activity. We review the main theoretical approaches that allow financial frictions to be embedded into general equilibrium models. We outline, from a policy perspective, the most recent empirical papers focusing on the propagation of exogenous shocks to the economy, with a particular emphasis on works dealing with time variation of parameters and other types of nonlinearities. We then present an application to the analysis of the changing transmission of financial shocks in the euro area. Results show that the effects of a financial shock are time-varying and contingent on the state of the economy. They are of negligible importance in normal times but they greatly matter in conditions of stress.

Keywords: financial crisis, nonlinearities, financial shocks

JEL Classification: C32, E32, E44, E58

Suggested Citation

Silvestrini, Andrea and Zaghini, Andrea, Financial Shocks and the Real Economy in a Nonlinear World: From Theory to Estimation (June 2015). CFS Working Paper, No. 505. Available at SSRN: https://ssrn.com/abstract=2618420 or http://dx.doi.org/10.2139/ssrn.2618420

Andrea Silvestrini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Zaghini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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