Feedbacks: Financial Markets and Economic Activity
- (pp. 1845-79)
Abstract
Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associated. "Financial stress" shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008–2009 crisis, but spreads improve within-crisis forecasts.Citation
Brunnermeier, Markus, Darius Palia, Karthik A. Sastry, and Christopher A. Sims. 2021. "Feedbacks: Financial Markets and Economic Activity." American Economic Review, 111 (6): 1845-79. DOI: 10.1257/aer.20180733Additional Materials
JEL Classification
- C51 Model Construction and Estimation
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G01 Financial Crises