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Dynamic Interactions Between Financial and Macroeconomic Imbalances: A Panel VAR Analysis

Amat Adarov ()

No 162, wiiw Working Papers from The Vienna Institute for International Economic Studies, wiiw

Abstract: We use Bayesian and GMM panel VAR frameworks to study interactions between financial cycles and macroeconomic imbalances based on a global sample of 24 countries spanning the period 1998‑2012. We find that financial cycles play an important role in shaping macroeconomic imbalances with expansions inducing economic overheating and a downward pressure on public debt-to-GDP ratios, and vice versa. Bank-based economies exhibit a deeper and faster response of business cycles to financial misalignments, while the impact in market-based economies is milder, but more persistent, as well as more significant for current account and public debt dynamics. Financial cycles invoke a particularly strong reaction of current account balances and especially public debt ratios in the euro area.

Keywords: financial cycles; macroeconomic imbalances; financial stability; business cycles; panel VAR; Bayesian VAR (search for similar items in EconPapers)
JEL-codes: E44 F32 G15 F4 (search for similar items in EconPapers)
Pages: 32 pages including 7 Tables and 12 Figures
Date: 2019-02
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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