Title

Feedbacks: Financial Markets and Economic Activity

Author(s)

Markus K. Brunnermeier Markus Brunnermeier (Princeton University)

Darius Palia Darius Palia (Rutgers University)

Karthik A. Sastry Karthik Sastry (Massachusetts Institute of Technology)

Christopher A. Sims Christopher 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.

Creation Date

2019-08

Section URL ID

Paper Number

257

URL

https://gceps.princeton.edu/wp-content/uploads/2019/09/257_Sims-Brunnermeier.pdf

File Function

Jel

G01

Keyword(s)

Suppress

false

Series

3