Theory Ahead of Measurement? Assessing the Nonlinear Effects of Financial Market Disruptions
Abstract: An important, yet untested, prediction of many macro models with financial frictions is that financial market disruptions can have highly nonlinear effects on economic activity. This paper presents empirical evidence supporting this prediction, and in particular that financial shocks have substantial (i) asymmetric and (ii) state dependent effects. First, negative shocks to credit supply have large and persistent effects on output, but positive shocks have no significant effect. Second, credit supply shocks have larger and more persistent effects in periods of weak economic growth.
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Description: Full text
Provider: Federal Reserve Bank of Richmond
Part of Series: Working Paper
Publication Date: 2016-12-01
Pages: 42 pages