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Credit Conditions and the Effects of Economic Shocks: Amplifications and Asymmetries

Andrea Carriero, Ana Galvão () and Massimiliano Marcellino

EMF Research Papers from Economic Modelling and Forecasting Group

Abstract: In this paper we address three empirical questions related to credit conditions. Do they change the dynamic interactions of economic variables by characterizing different regimes? Do they amplify the effects of economic shocks? Do they generate asymmetries in the effects of economic shocks depending on the size and sign of the shock? To answer these questions, we introduce endogenous regime switching in the parameters of a large Multivariate Autoregressive Index (MAI) model, where all variables react to a set of observable common factors. We develop Bayesian estimation methods and show how to compute responses to common structural shocks. We find that credit conditions do act as a trigger variable for regime changes. Moreover, demand and supply shocks are amplified when they hit the economy during periods of credit stress. Finally, good shocks seem to have more positive effects during stress time, in particular on unemployment.

Keywords: Credit conditions; Multivariate Autoregressive Index models; Smooth Transition; Bayesian VARs; Large datasets; Structural Analysis JEL Classification Numbers: E32; c11; C55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-ure
Date: 2018
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