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Unraveling exogenous shocks, financial stress and US economic performance

Author

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  • Yi-Chia Wang
  • Hong-Lin Su

Abstract

Purpose - This study aims to investigate the dynamics between exogenous shocks, financial stress and economic performance in the USA from January 1995 to August 2023. Design/methodology/approach - Granger-causality tests and impulse response analyses are used to examine causal relationships and dynamic responses among crude oil prices, real M2 money supply, financial stress and key economic indicators. Findings - This study reveals a significant correlation between elevated financial stress and reduced real output, along with disruptions in the labor market, potentially leading to economic recessionary trends. Failure to address these challenges could perpetuate labor market difficulties, weaken capital accumulation within the loanable funds market and ultimately hinder long-term economic growth prospects in the USA. Practical implications - This study offers insights for policymakers to mitigate financial stress. Recommendations include enhancing financial surveillance, strengthening regulatory frameworks, promoting economic diversification and implementing countercyclical policies to stabilize the economy and support labor markets. In addition, proactive monitoring of financial stress indicators can serve as early warning signals, aiding in timely interventions and effective risk management strategies. Originality/value - This research provides a comprehensive analysis of how the financial stress index (FSI) mediates the effects of external shocks on the US economy, addressing a gap in existing literature. The integration of the FSI into the analysis enhances the understanding of the transmission channels through which external shocks influence the economy.

Suggested Citation

  • Yi-Chia Wang & Hong-Lin Su, 2024. "Unraveling exogenous shocks, financial stress and US economic performance," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 42(2), pages 259-273, September.
  • Handle: RePEc:eme:sefpps:sef-04-2024-0255
    DOI: 10.1108/SEF-04-2024-0255
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    More about this item

    Keywords

    Exogenous shocks; Financial stress; Economic performance; The USA; E32; F32; G01;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G01 - Financial Economics - - General - - - Financial Crises

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