Deflationary financial shocks and inflationary uncertainty shocks: an SVAR Investigation

Roberto A. De Santis and Wouter Van der Veken

No 2727, Working Paper Series from European Central Bank

Abstract: What are the economic implications of financial and uncertainty shocks? We show that financial shocks cause a decline in output and goods prices, while uncertainty shocks cause a decline in output and an increase in goods prices. In response to un-certainty shocks, firms increase their markups, in line with the theory of self-insurance against being stuck with too low a price. This explains why goods prices may increase at the onset of a recession and are not accompanied by pronounced deflationary pressures. The two shocks are identified jointly with an approach that is less restrictive than Antolín-Díaz and Rubio-Ramírez’s method. JEL Classification: C32, E32

Keywords: Business cycles; narrative identification; SVAR; uncertainty shocks; financial shocks (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-fdg and nep-ifn
Note: 185689
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222727

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