Discussion Paper

No. 2013-24 | March 15, 2013
Financial Stress, Regime Switching and Macrodynamics: Theory and Empirics for the US, EU and Non-EU Countries

Abstract

Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper we study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent impacts on the real side of the economy whereas in regimes of low stress, shocks can easily dissipate having no lasting effects. In order to study the macroeconomic dynamics, with alternative paths resulting from financial stress shocks, we introduce a macromodel with a finance-macro link which uses multi-period decisions framework of economic agents. The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically then we use a Multi-Regime VAR (MRVAR) to study the impact of financial stress shocks on the macroeconomy in a large number of countries.

Paper submitted to the special issue

Economic Perspectives Challenging Financialization, Inequality and Crises


 

JEL Classification

E3 G21

Cite As

Willi Semmler and Pu Chen (2013). Financial Stress, Regime Switching and Macrodynamics: Theory and Empirics for the US, EU and Non-EU Countries. Economics Discussion Papers, No 2013-24, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-24

Assessment



Comments and Questions


Anonymous - Invited Reader Comment 1
April 10, 2013 - 14:12

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Christian R. Proaño - Invited Reader Comment 2
June 14, 2013 - 11:08

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Anonymous - Referee Report 1
August 07, 2013 - 13:39

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Willi Semmler - Replies to Referee Report and Comments
October 08, 2013 - 14:10

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Willi Semmler - Revised Version
October 08, 2013 - 14:12

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Anonymous - Referee Report 2
December 11, 2013 - 14:02

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Willi Semmler - Reply to Referee Report 2
March 28, 2014 - 08:15

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Willi Semmler - Revised Version - March 2014
March 28, 2014 - 08:17

See attached file