Feedbacks: Financial Markets and Economic Activity

Markus Konrad Brunnermeier · Darius N. Palia · Karthik Sastry · Christopher A. Sims

142 citations0/0 files storedAmerican Economic Review

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency Global Financial Crisis and Policies

Abstract

Is credit expansion a sign of desirable financial deepening or the prelude to an inevitable bust? We study this question in modern US data using a structural VAR model of 10 monthly frequency variables, identified by heteroskedasticity. Negative reduced-form responses of output to credit growth are caused by endogenous monetary policy response to credit expansion shocks. On average, credit and output growth remain positively associated. “Financial stress” shocks to credit spreads cause declines in output and credit levels. Neither credit aggregates nor spreads provide much advance warning of the 2008–2009 crisis, but spreads improve within-crisis forecasts. (JEL C51, E23, E31, E43, E44, E52, G01)

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2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 1999Chapter 21 The financial accelerator in a quantitative business cycle framework 2012Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008 2012Credit Spreads and Business Cycle Fluctuations 1989New Indexes of Coincident and Leading Economic Indicators 2006Were There Regime Switches in U.S. Monetary Policy?2015Monetary Policy Surprises, Credit Costs, and Economic Activity 2013Risk Shocks

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