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Business cycles, financial conditions, and nonlinearities

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  • Ivan Mendieta‐Muñoz
  • Doğuhan Sündal

Abstract

Using a Bayesian threshold vector autoregression model for the US economy, this paper tests whether nonlinear dynamics can arise from the endogenous interactions between traditional business cycles, depicted by investment decisions, profitability levels and aggregate demand levels, and financial conditions, depicted by credit market conditions, thus considering that the latter are important sources of instability and possible nonlinear propagators of other shocks. The results support the characterization of nonlinear dynamics in the transmission of shocks since there is evidence of asymmetric responses of the variables across two different regimes of financial stress, responding more strongly during loose financial conditions.

Suggested Citation

  • Ivan Mendieta‐Muñoz & Doğuhan Sündal, 2022. "Business cycles, financial conditions, and nonlinearities," Metroeconomica, Wiley Blackwell, vol. 73(2), pages 343-383, May.
    • Handle: RePEc:bla:metroe:v:73:y:2022:i:2:p:343-383
    DOI: 10.1111/meca.12363
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