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Output and Inflation Responses to Credit Shocks: Are There Threshold Effects in the Euro Area?

Calza Alessandro () and João Sousa ()
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Calza Alessandro: European Central Bank

Studies in Nonlinear Dynamics & Econometrics, 2006, vol. 10, issue 2, 1-21

Abstract: This paper investigates whether output and inflation respond asymmetrically to credit shocks in the euro area. The methodology, based on a non-linear VAR system, follows work by Balke (2000) for the U.S. The results reveal evidence of threshold effects related to credit conditions in the economy. Consistent with this finding, the impulse responses show some signs of asymmetric responses over the lending cycle. However, the results of the paper suggest that in the euro area non-linearities arising from credit market imperfections may be less pronounced than in the U.S., probably reflecting specific institutional features of its banking sector.

Date: 2006
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DOI: 10.2202/1558-3708.1253

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