Financial uncertainty and real activity: The good, the bad, and the ugly

Giovanni Caggiano, Efrem Castelnuovo, Silvia Delrio and Richard Kima

European Economic Review, 2021, vol. 136, issue C

Abstract: This paper quantifies the finance uncertainty multiplier (i.e., the magnifying effect of the real impact of uncertainty shocks due to credit frictions) by relying on two historical events related to the US economy, i.e., the large jump in financial uncertainty occurred in October 1987 (which was not accompanied by a deterioration of the credit supply conditions), and the comparable jump in financial uncertainty in September 2008 (which went hand-in-hand with an increase in financial stress). Working with a VAR framework and a set-identification strategy that focuses on - but it is not limited to - restrictions related to these two dates, we estimate the finance uncertainty multiplier to be around 2, i.e., credit supply disruptions are found to double the negative output response to an uncertainty shock. An exercise with employment as an indicator of the business cycle returns a finance uncertainty multiplier of about 1.5, i.e., lower but still sizeable.

Keywords: Uncertainty shocks; Finance-uncertainty multiplier; Set-identification; VAR; Credit supply disruptions; Financial frictions (search for similar items in EconPapers)
JEL-codes: C32 E32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292121001033
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Financial Uncertainty and Real Activity: The Good, the Bad, and the Ugly (2020)
Working Paper: Financial uncertainty and real activity: The good, the bad, and the ugly (2020)
Working Paper: Financial Uncertainty and Real Activity: The Good, the Bad, and the Ugly (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:136:y:2021:i:c:s0014292121001033

DOI: 10.1016/j.euroecorev.2021.103750

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().