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The importance of the financial system for the real economy

Author

Listed:
  • Sebastian Ankargren

    (Uppsala University)

  • Mårten Bjellerup

    (Swedish National Debt Office)

  • Hovick Shahnazarian

    (Ministry of Finance)

Abstract

This paper first describes financial variables that have been constructed to correspond to various channels in the transmission mechanism. Next, a Bayesian VAR model for the macroeconomy, with priors on the steady states, is augmented with these financial variables and estimated using Swedish data for 1989–2015. The results support three conclusions. First, the financial system is important and the strength of the results is dependent on identification, with the financial variables accounting for 10–25 % of the forecast error variance of Swedish GDP growth. Second, the suggested model produces an earlier signal regarding the probability of recession, compared to a model without financial variables. Third, the model’s forecasts for the deep downturn in 2008 and 2009, conditional on the development of the financial variables, outperform a macro-model that lacks financial variables. Furthermore, this improvement in modelling Swedish GDP growth during the financial crisis does not come at the expense of unconditional predictive power. Taken together, the results suggest that the proposed model presents an accessible possibility to analyse the macro-financial linkages and the GDP developments, especially during a financial crisis.

Suggested Citation

  • Sebastian Ankargren & Mårten Bjellerup & Hovick Shahnazarian, 2017. "The importance of the financial system for the real economy," Empirical Economics, Springer, vol. 53(4), pages 1553-1586, December.
  • Handle: RePEc:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1175-4
    DOI: 10.1007/s00181-016-1175-4
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    More about this item

    Keywords

    Transmission channels; Financial indicators; Macroeconomy; Business cycle; Credit cycle; Bayesian VAR;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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