Liquidity, Credit and Output: A Regime Change Model and Empirical Estimations

Willi Semmler and Levent Kockesen

No 1730, Working Papers from New School for Social Research, Department of Economics

Abstract: There is a long tradition which maintains that liquidity and credit impact aggregate economic activity. Recent events seem to give fresh support to this line of research. Economic theory on credit and financial markets is in search of mechanisms that might explain the strong propagation effect of real, monetary and financial shocks. We employ a simple macrodynamic model of threshold and regime change type to provide such a propagation mechanism. We estimate the model by transforming our continuous time form into an estimable discrete time form using the Euler approximation and a method proposed by Ozaki. We also approximate the model by employing the discrete time Smooth Transition Regression (STR) methodology. Our estimation procedures are applied to U.S. time series data. We find essential nonlinearities and regime changes in the data. The change of the dynamic properties of the estimated model occur as the variables pass through certain thresholds. Locally unstable but globally bounded fluctuations as well as asymmetric responses to shocks are detected.

Keywords: Regime change models; Smooth Transition Regression models; financial-real interaction; thresholds; asymmetry in business cycles (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-12
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:1730

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