Liquidity shocks and real GDP growth: Evidence from a Bayesian time-varying parameter VAR |
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| Institution: | 1. Central Bank of Turkey, Istiklal Cad. 10, Ulus, 06100 Ankara, Turkey;2. Department of Economics, TOBB University of Economics and Technology, Sögütözü Cad. 43, Sögütözü, 06560 Ankara, Turkey;1. Ifo Institute, Germany;2. CESifo, Germany;1. Department of Economics, Finance and Accounting, University of Liverpool Management School, Chatham Street, Liverpool L69 7ZH, UK;2. Accounting and Finance Subject Area, Adam Smith Business School, University of Glasgow, Glasgow G12 8QQ, UK;3. Accounting and Finance Division, Manchester Business School, University of Manchester, Booth Street, Manchester M15 6PB, UK |
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| Abstract: | We examine the dynamic impact of liquidity shocks resonating in stock and housing markets on real GDP growth. We fit a Bayesian time-varying parameter VAR model with stochastic volatility to US data from 1970 to 2014. GDP becomes highly sensitive to house market liquidity shocks as disruptions in the sector start to emerge, yet more resilient to stock market liquidity shocks throughout time. We provide substantial evidence in favour of asymmetric responses of GDP growth both across the business cycle, and among business cycle troughs. Stock and house market liquidity shocks explain, on average, 17% and 35% of the variation in GDP during the Great Recession, respectively. |
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| Keywords: | Stock market liquidity House market liquidity Liquidity shocks Time-varying parameter VAR |
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