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Macro-Financial Linkages: The Role of the Institutional Framework

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  • Aurelien Leroy

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

  • Adrian Pop

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

Abstract

In this paper, we assess the quantitative impact of various financial shocks on the real activity and explicitly address the issue of heterogeneity in the macro-financial linkages. For that purpose, we use VAR models as well as the local projection method for 18 OECD countries based on quarterly data between 1995 and 2014. We take into account three main dimensions of the institutional framework likely to explain the observed cross-country heterogeneity in the propagation of financial shocks: the product market regulation, the employment protection, and the financial structure. Our main findings indicate that financial shocks have a stronger impact in countries characterized by a higher competition-friendly regulatory stance, a stronger employment protection, and a more market-oriented financial structure. We also show that the varieties of capitalism, described by the particular mix of different institutional arrangements, do not play a significant role in shaping the macro-financial linkages. This result suggests that, although considered individually, goods, labor, and financial markets regulations are robustly linked to macroeconomic fluctuations, there is no prima facie evidence for superior performance of any given mix of institutional arrangements observed in OECD countries.
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Suggested Citation

  • Aurelien Leroy & Adrian Pop, 2019. "Macro-Financial Linkages: The Role of the Institutional Framework," Post-Print hal-03367548, HAL.
    • Handle: RePEc:hal:journl:hal-03367548
    DOI: 10.1016/j.jimonfin.2018.12.002
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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