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Financial frictions and regime switching: The role of collateral asset in emerging stock market

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  • Awijen, Haithem
  • Hammami, Sami

Abstract

This paper examines empirically the nonlinear business cycle dynamics due to the presence of financial frictions. Using a threshold vector auto regression, the authors estimate the behavior of interest rate shocks in which a regime change occurs if the two respective threshold variables namely asset price and exchange rate cross their critical threshold value. The authors find evidence that non linearity is strongly directed by regime-dependency; in fact the results suggest that output growth response is bigger when the economy is initially an appreciation regime.In addition, the empirical findings prove the presence of asymmetric responses to interest rate shocks however this reaction is recognized via asset price "debt-deflation mechanism" rather than shocks stemming from "exchange rate depreciation spirals". The results also show that a response to large shocks to interest rate shows disproportionate effects compared with responses to small shocks.

Suggested Citation

  • Awijen, Haithem & Hammami, Sami, 2017. "Financial frictions and regime switching: The role of collateral asset in emerging stock market," Economics Discussion Papers 2017-6, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:20176
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Collateral Constraints; Business Cycle Asymmetry; financial frictions; Threshold VAR;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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