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The real effects of financial stress in the Eurozone

Mallick, Sushanta K. and Sousa, Ricardo J. (2013) The real effects of financial stress in the Eurozone. International Review of Financial Analysis, 30. pp. 1-17. ISSN 1057-5219

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Identification Number: 10.1016/j.irfa.2013.05.003

Abstract

This paper examines the real effects of financial stress in the Euro-zone, using two identification strategies based on a Bayesian Structural VAR and a Sign-Restriction VAR. As expansionary monetary policy has been blamed to have fuelled asset price bubble, it is important to assess the macroeconomic impact of both a financial stress shock and a monetary policy shock. We find that unexpected variation in financial stress conditions plays an important role in explaining output fluctuations and, therefore, demands an aggressive response by the monetary authority to stabilize output. This, in turn, indicates a preference shift from inflation targeting. We also show that a monetary policy contraction strongly deteriorates financial stress conditions. As a result, rapid credit growth due to a long period of low interest rates possibly contributed to an increase in asset prices and encouraged unsustainable demand growth as observed in the recent financial crisis

Item Type: Article
Official URL: http://www.journals.elsevier.com/international-rev...
Additional Information: © 2013 Elsevier Inc
Divisions: Financial Markets Group
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
Sets: Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 16 Jul 2013 08:48
Last Modified: 20 Nov 2019 10:54
URI: http://eprints.lse.ac.uk/id/eprint/51096

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