Liquidity Shocks and Real GDP Growth: Evidence from a Bayesian Time-Varying Parameter VAR

38 Pages Posted: 8 Dec 2016 Last revised: 24 Dec 2016

See all articles by Michael Ellington

Michael Ellington

University of Liverpool

Chris Florackis

University of Liverpool (UK)

Costas Milas

University of Liverpool

Date Written: December 23, 2016

Abstract

We examine the dynamic impact of liquidity shocks resonating in stock and housing markets on real GDP growth. We fit a Bayesian time-varying parameter VAR model with stochastic volatility to US data from 1970 to 2014. GDP becomes highly sensitive to house market liquidity shocks as disruptions in the sector start to emerge, yet more resilient to stock market liquidity shocks throughout time. We provide substantial evidence in favour of asymmetric responses of GDP growth both across the business cycle, and among business cycle troughs. Stock and house market liquidity shocks explain, on average, 17% and 35% of the variation in GDP during the Great Recession, respectively.

Keywords: Stock Market Liquidity, House Market Liquidity, Liquidity Shocks, Time-varying Parameter VAR

JEL Classification: C11, C32, E44, G12

Suggested Citation

Ellington, Michael and Florackis, Chris and Milas, Costas, Liquidity Shocks and Real GDP Growth: Evidence from a Bayesian Time-Varying Parameter VAR (December 23, 2016). Journal of International Money and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2882489 or http://dx.doi.org/10.2139/ssrn.2882489

Michael Ellington (Contact Author)

University of Liverpool ( email )

Chatham Street
Brownlow Hill
Liverpool, L69 7ZA
United Kingdom

Chris Florackis

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

Costas Milas

University of Liverpool ( email )

Chatham Street
Brownlow Hill
Liverpool
United Kingdom

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