Financial Conditions and the Risks to Economic Growth in the United States Since 1875

86 Pages Posted: 23 Apr 2020

See all articles by Patrick J. Coe

Patrick J. Coe

Carleton University

Shaun P. Vahey

University of Warwick - Warwick Business School

Date Written: April 22, 2020

Abstract

We explore the historical relationship between financial conditions and real economic growth for quarterly U.S. data from 1875 to 2017 with a flexible empirical copula modelling methodology. We compare specifications with both linear and non-linear dependence, and with both Gaussian and non-Gaussian marginal distributions. Our results indicate strong statistical support for models that are both non-Gaussian and nonlinear for our historical data, with considerable heterogeneity across sub-samples. We demonstrate that ignoring the contribution of financial conditions typically understates the conditional downside risks to economic growth in crises. For example, accounting for financial conditions more than doubles the probability of negative growth in the year following the 1929 stock market crash.

Keywords: Probabilities of economic events, Vulnerable growth, Growth at risk, Great Depression

JEL Classification: C14, C32, C53, E37, E44, N10, N20

Suggested Citation

Coe, Patrick J. and Vahey, Shaun P., Financial Conditions and the Risks to Economic Growth in the United States Since 1875 (April 22, 2020). CAMA Working Paper No. 36/2020, Available at SSRN: https://ssrn.com/abstract=3582337 or http://dx.doi.org/10.2139/ssrn.3582337

Patrick J. Coe

Carleton University ( email )

1125 colonel By Drive
Ottawa, K1S 5B6
Canada

Shaun P. Vahey (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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