Financial distress and real economic activity in Lithuania: a Granger causality test based on mixed-frequency VAR

Andrea Cipollini and Ieva Mikaliunaite-Jouvanceau

Empirical Economics, 2021, vol. 61, issue 2, No 12, 855-881

Abstract: Abstract In this paper, we extend the monthly financial stress index for Lithuania, computed by the European Central Bank, to a daily frequency and we also include banking sector stress among its constituents, beyond bond, equity and foreign exchange markets. We investigate the causal relationship between the daily financial stress index and monthly industrial production growth, using a Granger causality test applied to a mixed-frequency VAR. Our results suggest evidence of Granger causality from financial stress to industrial production growth once the index is enriched by daily observations from the financial markets. Our findings, based on impulse response analysis, confirm the negative effect of financial stress on real economy found in the empirical literature through common frequency analysis. Finally, the comparison between common and mixed frequency analysis suggests that ignoring the information content of daily data would lead to a mild temporal aggregation bias that could affect the evaluation of financial stress shocks on industrial production.

Keywords: Granger causality; Financial stress index; Mixed frequency data (search for similar items in EconPapers)
JEL-codes: C32 E44 G10 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00181-020-01888-2

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