Monetary Policy, Financial Shocks and Economic Activity

Posted: 2 Aug 2021 Last revised: 6 Nov 2021

See all articles by Anastasios Evgenidis

Anastasios Evgenidis

University of Newcastle - Newcastle University Business School

A. (Tassos) G. Malliaris

Loyola University Chicago

Date Written: November 5, 2021

Abstract

This paper contributes to a deeper understanding of macroeconomic outcomes to financial market disturbances and the central bank’s role in financial stability, by using Bayesian VAR (BVAR) models. We document that a shock that increases credit to non-financial sector leads to a persistent decline in economic activity. In addition, we examine whether the behavior of financial variables is useful in signaling the 2008 recession. The answer is positive as our medium-scale BVAR generates early warning signals pointing to a sustained slowdown in growth. Finally, we suggest that the expansion phase of the business cycle can be subdivided into an early and a late expansion. Based on this distinction, we show that if the Fed had raised the policy rate when the economy moved from the early to late expansion, it could have mitigated the severity of the last recession.

Keywords: financial shocks, credit, spreads, VAR, financial crisis, monetary policy

JEL Classification: E50, E52, E58

Suggested Citation

Evgenidis, Anastasios and Malliaris, A. (Tassos) G., Monetary Policy, Financial Shocks and Economic Activity (November 5, 2021). Available at SSRN: https://ssrn.com/abstract=3896636 or http://dx.doi.org/10.2139/ssrn.3896636

Anastasios Evgenidis

University of Newcastle - Newcastle University Business School ( email )

5 Barrack Road
Devonshire Building
NEWCASTLE UPON TYNE, NE1 7RU
United Kingdom

A. (Tassos) G. Malliaris (Contact Author)

Loyola University Chicago ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

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