Financial sector-output dynamics in the euro area: Non-linearities reconsidered

Frauke Schleer and Willi Semmler

No 13-068, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for euro area countries. Our study employs newly constructed financial condition indices that incorporate extensively banking variables. We apply a nonlinear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the financial sector-output linkages. The VSTAR model appears appropriate since it allows for smooth regime changes and asymmetric dynamics. We find that regime-switching takes place rather smoothly which dampens the negative output response after a shock in the financial sector in the selected euro area countries. Moreover, linearity cannot be rejected for all countries over some extensive time period questioning non-linearities in the financial sector-output nexus as unambiguous feature. In particular, we show that the negative effect of financial stress on output typically observed is not always present. This holds specifically for the time before the Lehman collapse, even if this is a model-defined high stress regime. After the collapse, we observe strong amplification mechanisms. This suggests that events leading to a strong economic breakdown are rare but large events and related to financial cycles which exhibit low frequency.

Keywords: Vector STAR; financial stress; financial cycle; real economy; regime-switching; euro area (search for similar items in EconPapers)
JEL-codes: E2 E44 G01 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/82626/1/768060486.pdf (application/pdf)

Related works:
Working Paper: Financial sector-output dynamics in the euro area: Non-linearities reconsidered (2014)
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:zbw:zewdip:13068

Access Statistics for this paper

More papers in ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().