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The role of financial stress in the economic activity: Fresh evidence from a Granger‐causality in quantiles analysis for the UK and Germany
Author(s) -
Saliminezhad Andisheh,
Bahramian Pejman
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1870
Subject(s) - quantile , causality (physics) , granger causality , economics , econometrics , distribution (mathematics) , conditional probability distribution , quantile regression , financial crisis , macroeconomics , mathematics , mathematical analysis , physics , quantum mechanics
This study examines the dynamic causal relationship between financial stress index and economic activity in the UK and Germany for the period from 2003 to 2018. Unlike the previous studies which ignore the consideration of all quantiles of distribution, we employ a Granger causality in quantiles that captures causal links in each quantile of distribution. Hence we are able to disseminate between the causality in the median and the tails of the conditional distribution. Our findings indicate that there is a significant, negative causal relationship running from financial stress to economic activity in both countries. However, the changes in the financial stress level in Germany start influencing the industrial production earlier (when economic activity is at lower levels) than in the UK. Our results highlight the emphasis on the consideration of the entire conditional distribution to avoid the risk of misleading inferences on the causality analysis.