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Feedbacks: Financial Markets and Economic Activity

Author

Listed:
  • Markus K. Brunnermeier

    (Princeton University)

  • Darius Palia

    (Rutgers University)

  • Karthik A. Sastry

    (Massachusetts Institute of Technology)

  • Christopher A. Sims

    (Princeton University)

Abstract

Our structural VAR with 10 monthly variables and identified by heteroscedasticity shows that credit and output growth are mostly positively associated. Negative reduced form responses to credit growth are attributed in our model to the monetary policy response to credit expansion shocks. Financial stress, measured by rises in interest rate spreads, is followed by declines in output and shrinkage of credit. We find two distinct sources of financial stress shocks. Neither credit aggregates nor rate spreads provide much advance warning of the 2008-9 crisis, but the spreads improve the model forecasts during the crisis.

Suggested Citation

  • Markus K. Brunnermeier & Darius Palia & Karthik A. Sastry & Christopher A. Sims, 2019. "Feedbacks: Financial Markets and Economic Activity," Working Papers 257, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:257
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    References listed on IDEAS

    as
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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