Financial sector-output dynamics in the euro area : non-linearities reconsidered


Schleer, Frauke ; Semmler, Willi


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URL: https://ub-madoc.bib.uni-mannheim.de/34710
URN: urn:nbn:de:bsz:180-madoc-347106
Document Type: Working paper
Year of publication: 2013
The title of a journal, publication series: ZEW Discussion Papers
Volume: 13-068
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > Zentrum für Europ. Wirtschaftsforschung (ZEW)
MADOC publication series: Veröffentlichungen des ZEW (Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: E2 , E44 , G01,
Keywords (English): Vector STAR , financial stress , financial cycle , real economy , regimeswitching , euro area
Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for euro area countries. Our study employs newly constructed financial condition indices that incorporate extensively banking variables. We apply a nonlinear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the financial sector-output linkages. The VSTAR model appears appropriate since it allows for smooth regime changes and asymmetric dynamics. We find that regime-switching takes place rather smoothly which dampens the negative output response after a shock in the financial sector in the selected euro area countries. Moreover, linearity cannot be rejected for all countries over some extensive time period questioning non-linearities in the financial sector-output nexus as unambiguous feature. In particular, we show that the negative effect of financial stress on output typically observed is not always present. This holds specifically for the time before the Lehman collapse, even if this is a model-defined high stress regime. After the collapse, we observe strong amplification mechanisms. This suggests that events leading to a strong economic breakdown are rare but large events and related to financial cycles which exhibit low frequency.

Das Dokument wird vom Publikationsserver der Universitätsbibliothek Mannheim bereitgestellt.




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Schleer, Frauke ; Semmler, Willi (2013) Financial sector-output dynamics in the euro area : non-linearities reconsidered. Open Access ZEW Discussion Papers Mannheim 13-068 [Working paper]
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