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Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations

Author

Listed:
  • Willi Semmler

    (Department of Economics, New School for Social Research)

  • Levent Koçkesen

    (Department of Economics, Columbia University)

Abstract

There is a long tradition which maintains that liquidity and credit impact aggregate economic activity. Recent events seem to give fresh support to this line of research. Economic theory on credit and financial markets is in search of mechanisms that might explain the strong propagation effect of real, monetary and financial shocks. We employ a simple macrodynamic model of threshold and regime change type to provide such a propagation mechanism. We estimate the model by transforming our continuous time form into an estimable discrete time form using the Euler approximation and a method proposed by Ozaki. We also approximate the model by employing the discrete time Smooth Transition Regression (STR) methodology. Our estimation procedures are applied to U.S. time series data. We find essential nonlinearities and regime changes in the data. The change of the dynamic properties of the estimated model occur as the variables pass through certain thresholds. Locally unstable but globally bounded fluctuations as well as asymmetric responses to shocks are detected.

Suggested Citation

  • Willi Semmler & Levent Koçkesen, 2017. "Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations," Working Papers 1730, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1730
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    References listed on IDEAS

    as
    1. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    2. Edward J. Nell & Willi Semmler (ed.), 1991. "Nicholas Kaldor and Mainstream Economics," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-10947-0, March.
    3. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    4. R. H. Day & T. Y. Lin, 1991. "A Keynesian Business Cycle," Palgrave Macmillan Books, in: Edward J. Nell & Willi Semmler (ed.), Nicholas Kaldor and Mainstream Economics, chapter 16, pages 281-305, Palgrave Macmillan.
    5. Blatt, John M, 1978. "On the Econometric Approach to Business-Cycle Analysis," Oxford Economic Papers, Oxford University Press, vol. 30(2), pages 292-300, July.
    6. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-137, March.
    7. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
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    Cited by:

    1. Carl Chiarella & Peter Flaschel & Willi Semmler, 2001. "The macrodynamics of debt deflation," Chapters, in: Riccardo Bellofiore & Piero Ferri (ed.), Financial Fragility and Investment in the Capitalist Economy, chapter 7, Edward Elgar Publishing.
    2. Willi Semmler & Fabio Della Rossa & Giuseppe Orlando & Gabriel R. Padro Rosario & Levent Kockesen, 2023. "Endogenous Economic Resilience, Loss of Resilience, Persistent Cycles, Multiple Attractors, and Disruptive Contractions," Working Papers 2309, New School for Social Research, Department of Economics.
    3. José Pedro Bastos Neves & Willi Semmler, 2022. "Credit, output and financial stress: A non‐linear LVSTAR application to Brazil," Metroeconomica, Wiley Blackwell, vol. 73(3), pages 900-923, July.

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    More about this item

    Keywords

    Regime change models; Smooth Transition Regression models; financial-real interaction; thresholds; asymmetry in business cycles;
    All these keywords.

    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

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