Deflationary financial shocks and inflationary uncertainty shocks: an SVAR Investigation
Roberto A. De Santis and
Wouter Van der Veken
No 2727, Working Paper Series from European Central Bank
What are the economic implications of financial and uncertainty shocks? We show that financial shocks cause a decline in output and goods prices, while uncertainty shocks cause a decline in output and an increase in goods prices. In response to un-certainty shocks, firms increase their markups, in line with the theory of self-insurance against being stuck with too low a price. This explains why goods prices may increase at the onset of a recession and are not accompanied by pronounced deflationary pressures. The two shocks are identified jointly with an approach that is less restrictive than Antolín-Díaz and Rubio-Ramírez’s method. JEL Classification: C32, E32
Keywords: Business cycles; narrative identiﬁcation; SVAR; uncertainty shocks; ﬁnancial shocks (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222727
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