Are the effects of financial market disruptions big or small?

Author(s)
Alexander Ziegenbein, Regis Barnichon, Chistian Matthes
Abstract

While episodes of financial distress are followed by large and persistent drops in economic activity, structural time series analyses point to relatively mild and transitory effects of financial market disruptions. We argue that these seemingly contradictory findings are due to the asymmetric effects of financial shocks, which have been predicted theoretically but not taken into account empirically. We estimate a model designed to identify the (possibly asymmetric) effects of financial market disruptions, and we find that a favorable financial shock —an easing of financial conditions— has little effect on output, but an adverse shock has large and persistent effects. In a counter-factual exercise, we find that over two thirds of the gap between current US GDP and its 2007 pre-crisis trend was caused by the 2007-2008 financial shocks.

Organisation(s)
Department of Economics
External organisation(s)
Indiana University Bloomington, Federal Reserve Bank of San Francisco
Journal
The Review of Economics and Statistics
Volume
104
Pages
557-570
No. of pages
14
ISSN
0034-6535
DOI
https://doi.org/10.1162/rest_a_00972
Publication date
09-2020
Peer reviewed
Yes
Austrian Fields of Science 2012
502018 Macroeconomics
Keywords
ASJC Scopus subject areas
Economics and Econometrics, Social Sciences (miscellaneous)
Portal url
https://ucrisportal.univie.ac.at/en/publications/are-the-effects-of-financial-market-disruptions-big-or-small(138f5090-99cb-4f57-90e6-8d1686ac764e).html