Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions

43 Pages Posted: 2 Dec 2016

See all articles by Regis Barnichon

Regis Barnichon

Federal Reserve Bank of San Francisco

Christian Matthes

Federal Reserve Bank of Richmond

Alexander Ziegenbein

Universitat Pompeu Fabra

Date Written: 2016-12-01

Abstract

An important, yet untested, prediction of many macro models with financial frictions is that financial market disruptions can have highly nonlinear effects on economic activity. This paper presents empirical evidence supporting this prediction, and in particular that financial shocks have substantial (i) asymmetric and (ii) state dependent effects. First, negative shocks to credit supply have large and persistent effects on output, but positive shocks have no significant effect. Second, credit supply shocks have larger and more persistent effects in periods of weak economic growth.

Suggested Citation

Barnichon, Regis and Matthes, Christian and Ziegenbein, Alexander, Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions (2016-12-01). FRB Richmond Working Paper No. 16-15. Available at SSRN: https://ssrn.com/abstract=2879284

Regis Barnichon (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Christian Matthes

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Alexander Ziegenbein

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

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