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Are the Effects of Financial Market Disruptions Big or Small?

Régis Barnichon1; Christian Matthes2; Alexander Ziegenbein3

1 Federal Reserve Bank of San Francisco, CEPR · 2 Indiana University · 3 University of Vienna

The Review of Economics and Statistics 2022

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 counterfactual exercise, we find that over two-thirds of the gap between current US GDP and its 207 precrisis trend was caused by the 2007–2008 financial shocks.

DOI
10.1162/rest_a_00972
Volume
104 (3)
Pages
557-570
Language
en
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