ON THE RELATIONSHIP BETWEEN FINANCIAL INSTABILITY AND ECONOMIC PERFORMANCE: STRESSING THE BUSINESS OF NONLINEAR MODELING
David Ubilava ()
Macroeconomic Dynamics, 2019, vol. 23, issue 1, 80-100
The recent global financial crisis and the subsequent recession have revitalized the discussion on causal interactions between financial and economic sectors. In this study, I apply the financial stress and the national activity indicesâ€“respectively developed by Federal Reserve Banks of Kansas City and Chicagoâ€“to investigate the impact of financial uncertainty on an overall economic performance. I examine nonlinear dynamics in a vector smooth transition autoregressive framework, and illustrate regime-dependent asymmetries in the financial and economic indices using the generalized impulse-response functions. The results reveal more amplified dynamics during the stressed conditions. I further evaluate benefits of nonlinear modeling in an out-of-sample setting. The forecasting exercise brings out the important advantages that nonlinear modeling provides in the identification of the causal effect of financial instability on overall economic performance.
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Working Paper: On the Relationship between Financial Instability and Economic Performance: Stressing the Business of Nonlinear Modelling (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:23:y:2019:i:01:p:80-100_00
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