Financial Stress, Regime Switching and Macrodynamics
Pu Chen and
Willi Semmler
Chapter Chapter 20 in Nonlinearities in Economics, 2021, pp 315-335 from Springer
Abstract:
Abstract Monetary responses to financial stress have recently become an important issue in macroeconomic and policy discussions in the USA as well as in the EU. In this paper, the authors study two regimes of monetary responses. While the fundamentals of an economy are assumed to have a long-run equilibrium, the adjustment process towards the equilibrium can be different in different regimes. During a period of deteriorated economic conditions, rate cuts are the most often applied policy responses. Therefore, rate cuts can be used as a natural regime identifier. We observe that the financial stress shocks have a large and persistent negative impact on the real side of the economy, and their impact is stronger in the non-rate-cut regime than in the rate-cut regime. A macro-foundation of such a Finance-Macro model type is given in Mittnik and Semmler (J Econ Behav Organ 83:502–522, 2013) and Chen and Semmler (J Econ Dyn Control 91:318–348, 2018). The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically we use a multi-regime cointegrated VAR (MRCIVAR) to study the impact of financial stress shocks and monetary policy on the macroeconomy in different countries.
Keywords: Multi-regime cointegrated VAR (MRCIVAR); Cycles; Nonlinear model predictive control (NMPC); Business cycles (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations:
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
Related works:
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:spr:dymchp:978-3-030-70982-2_20
Ordering information: This item can be ordered from
http://www.springer.com/9783030709822
DOI: 10.1007/978-3-030-70982-2_20
Access Statistics for this chapter
More chapters in Dynamic Modeling and Econometrics in Economics and Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().