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The Effect of a Financial Block on the Identification of Confidence Shocks in a Structural VAR Model

Christian Myohl

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: This paper studies the propagation and properties of a confidence shock in a structural vector autoregression (VAR) model with and without financial variables. The addition of a financial block does not considerably change the propagation and the contribution to the forecast error variance by the confidence shock. Nevertheless, for specific historical episodes, the inclusion of a financial block plays a role. In several recessions, the VAR with the financial block assigns a smaller role to confidence shocks for the fall in GDP. This suggests that the confidence shock may not be properly identified in a structural VAR when financial variables are omitted. Further, I identify a financial channel by which the confidence shock affects economic activity.

Keywords: Confidence shocks; structural VARs; financial channel (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mac
Date: 2018-08
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