The real effects of financial stress in the Eurozone

Sushanta Mallick () and Ricardo Sousa

International Review of Financial Analysis, 2013, vol. 30, issue C, 1-17

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.

Keywords: Monetary policy; Financial stress; Bayesian Structural VAR; Sign-Restrictions; Eurozone (search for similar items in EconPapers)
JEL-codes: E37 E52 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (64)

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Working Paper: The real effects of financial stress in the Euro zone (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:30:y:2013:i:c:p:1-17

DOI: 10.1016/j.irfa.2013.05.003

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