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Financial Stress Regimes and the Macroeconomy
Author(s) -
GALVÃO ANA BEATRIZ,
OWYANG MICHAEL T.
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12491
Subject(s) - economics , recession , inflation (cosmology) , index (typography) , monetary economics , macro , financial market , business cycle , variable (mathematics) , autoregressive model , econometrics , finance , macroeconomics , mathematics , mathematical analysis , physics , theoretical physics , world wide web , computer science , programming language
Some financial stress events lead to macroeconomic downturns, while others appear to be isolated to financial markets. We identify financial stress regimes using a model that explicitly links financial variables to macro‐economic outcomes. The stress regimes are identified using an unbalanced panel of financial variables with an embedded method for variable selection. Our identified stress regimes are associated with corporate credit tightening and with NBER recessions. An exogenous deterioration in our financial conditions index has strong negative effects in economic activity, and negative amplification effects on inflation in the stress regime. These results are obtained with a novel factor‐augmented vector autoregressive model with smooth‐transition regimes (FASTVAR).