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Liquidity shocks and real GDP growth: Evidence from a Bayesian time-varying parameter VAR

Michael Ellington, Chris Florackis and Costas Milas ()

Journal of International Money and Finance, 2017, vol. 72, issue C, 93-117

Abstract: We examine the dynamic impact of liquidity shocks resonating in stock and housing markets on real GDP growth. We fit a Bayesian time-varying parameter VAR model with stochastic volatility to US data from 1970 to 2014. GDP becomes highly sensitive to house market liquidity shocks as disruptions in the sector start to emerge, yet more resilient to stock market liquidity shocks throughout time. We provide substantial evidence in favour of asymmetric responses of GDP growth both across the business cycle, and among business cycle troughs. Stock and house market liquidity shocks explain, on average, 17% and 35% of the variation in GDP during the Great Recession, respectively.

Keywords: Stock market liquidity; House market liquidity; Liquidity shocks; Time-varying parameter VAR (search for similar items in EconPapers)
JEL-codes: C11 C32 E44 G12 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Liquidity Shocks and Real GDP Growth: Evidence from a Bayesian Time-varying Parameter VAR (2016) Downloads
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Handle: RePEc:eee:jimfin:v:72:y:2017:i:c:p:93-117