Financial stress and economic dynamics: The transmission of crises |
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| Affiliation: | 1. Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany;2. Monetary Affairs, Federal Reserve Board, Washington, D.C. 20551, USA;1. College of Business and Public Management, University of La Verne, 1950 Third St., La Verne, CA 91750, United States;2. College of Business Administration, University of New Orleans, 2000 Lakeshore Dr, New Orleans, LA 70148, United States;1. Department of Econometrics, Pamukkale University, Denizli, Turkey;2. Department of Business Administration, METU, Ankara, Turkey;3. Department of Economics, University of Pretoria, Pretoria, South Africa;1. Department of Economics, University of Crete, University Campus, 74100 Rethymno, Greece;2. Department of Accounting and Finance, Hellenic Mediterranean University, 71004 Heraklion, Greece;3. Nyenrode Business Universiteit, Straatweg 25, 3621 BG Breukelen, P.O. Box 130, 3620, AC Breukelen, The Netherlands;1. Nyenrode Business Universiteit, Straatweg 25, 3621 BG Breukelen, P.O. Box 130, 3620 AC Breukelen, The Netherlands;2. Department of Economics, University of Crete, Rethymno Campus, 74100 Rethymno, Greece |
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| Abstract: | A financial stress index for the United States is introduced—one used by the staff of the Federal Reserve Board during the financial crisis of 2008–2009—and its׳ interaction with real activity, inflation and monetary policy is investigated using a Markov-switching VAR model, estimated with Bayesian methods. A “stress event” is defined as a period of adverse latent Markov states. Results show that time variation is statistically important, that stress events line up well with historical events, and that shifts to stress events are highly detrimental for the economy. Conventional monetary policy is shown to be weak during such periods. |
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| Keywords: | Nonlinearity Markov switching Financial crises Monetary policy |
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