Financial stress, regime switching and macrodynamics: Theory and empirics for the US, EU and non-EU countries

Pu Chen and Willi Semmler

No 2013-24, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper we study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent impacts on the real side of the economy whereas in regimes of low stress, shocks can easily dissipate having no lasting effects. In order to study the macroeconomic dynamics, with alternative paths resulting from financial stress shocks, we introduce a macromodel with a finance-macro link which uses multi-period decisions framework of economic agents. The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically then we use a Multi-Regime VAR (MRVAR) to study the impact of financial stress shocks on the macroeconomy in a large number of countries.

Keywords: financial stress; macro dynamics; MRVAR (search for similar items in EconPapers)
JEL-codes: E3 G21 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-mac and nep-opm
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Citations: View citations in EconPapers (1)

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Journal Article: Financial stress, regime switching and macrodynamics: Theory and empirics for the US, the EU and non-EU countries (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201324

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