Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/70799 
Year of Publication: 
2013
Series/Report no.: 
Economics Discussion Papers No. 2013-24
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
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.
Subjects: 
financial stress
macro dynamics
MRVAR
JEL: 
E3
G21
Creative Commons License: 
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Document Type: 
Working Paper

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