Hostname: page-component-cb9f654ff-mnl9s Total loading time: 0 Render date: 2025-08-28T19:28:12.454Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial shocks and inflation dynamics

Published online by Cambridge University Press:  11 November 2021

Angela Abbate ,
Sandra Eickmeier  and
Esteban Prieto
Angela Abbate
Affiliation:
Swiss National Bank
Sandra Eickmeier*
Affiliation:
Deutsche Bundesbank, CAMA, CEPR
Esteban Prieto
Affiliation:
Deutsche Bundesbank, IWH, CEPR
*
*Corresponding author. Email: sandra.eickmeier@bundesbank.de.
Get access Rights & Permissions [Opens in a new window]

Abstract

We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the “missing disinflation” during the Great Recession. We apply a Bayesian vector autoregressive model to US data and identify financial shocks through a combination of narrative and short-run sign restrictions. Our main finding is that contractionary financial shocks temporarily increase inflation. This result withstands a large battery of robustness checks. Negative financial shocks help therefore to explain why inflation did not drop more sharply in the aftermath of the financial crisis. Our analysis suggests that higher borrowing costs after negative financial shocks can account for the modest decrease in inflation after the financial crisis. A policy implication is that financial shocks act as supply-type shocks, moving output and inflation in opposite directions, thereby worsening the trade-off for a central bank with a dual mandate.

Keywords

Financial shocksinflation dynamicsmonetary policyfinancial frictionscost channelsign restrictionsE31E44E58

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 2 , March 2023 , pp. 350 - 378
Copyright
© The Author(s), 2021. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Abbate, A., Eickmeier, S., Lemke, W. and Marcellino, M. (2016) The changing international transmission of financial shocks: Evidence from a classical time-varying FAVAR. Journal of Money, Credit and Banking 48, 573–601.CrossRefGoogle Scholar
Adrian, T., Moench, E. and Shin, H. (2016) Dynamic Leverage Asset Pricing. CEPR Discussion Papers 11466, C.E.P.R. Discussion Papers.Google Scholar
Alquist, R., Kilian, L. and Vigfusson, R. (2013) Forecasting the price of oil. In: Elliott, G. and Timmermann, A. (eds.), Handbook of Economic Forecasting, vol. 2, pp. 427–507. Amsterdam: North-Holland.Google Scholar
Ang, A. and Piazzesi, M. (2003) A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables. Journal of Monetary Economics 50(4), 745–787.CrossRefGoogle Scholar
AntolÍn-DÍaz, J. and Rubio-RamÍrez, J. F. (2018) Narrative sign restrictions for SVARs. American Economic Review 108(10), 2802–2829.CrossRefGoogle Scholar
Antoun de Almeida, L. (2015) Firms’ balance sheets and sectoral inflation in the euro area during the financial crisis. Economics Letters 135, 31–33.CrossRefGoogle Scholar
Arias, J., Rubio-RamÍrez, J. and Waggoner, D. (2018) Inference based on SVARs identified with sign and zero restrictions: Theory and applications. Technical report.CrossRefGoogle Scholar
Arias, J. E., Caldara, D. and Rubio-RamÍrez, J. F. (2019) The systematic component of monetary policy in SVARs: An agnostic identification procedure. Journal of Monetary Economics 101(C), 1–13.CrossRefGoogle Scholar
Balleer, A., Hristov, N. and Menno, D. (2015) Financial market imperfections and the pricing decision of firms: Theory and evidence. No 1173, 2015 Meeting Papers from Society for Economic Dynamics.Google Scholar
Barsky, R. and Sims, E. (2011) News shocks and business cycles. Journal of Monetary Economics 58 (3), 273–289.CrossRefGoogle Scholar
Barth, M. and Ramey, V. (2001) The cost channel of monetary transmission. In: Bernanke, B. and Rogoff, K. (eds.), NBER Macroeconomics Annual 2001, vol. 16, pp. 199–240. MIT Press.CrossRefGoogle Scholar
Bean, C., Paustian, M., Penalver, A. and Taylor, T. (2010) Monetary policy after the fall. Mimeo. Bank of England; paper presented at the Federal Reserve Bank of Kansas City Annual Conference, Jackson Hole, Wyoming.Google Scholar
Bernanke, B. (2009) The crisis and the policy response. Speech at the Stamp Lecture, London School of Economics, London, England, January 13, 2009.Google Scholar
Bernanke, B. (2010a) The economic outlook and monetary policy. Speech at the Federal Reserve Bank of Kansas City Economic Syposium, Jackson Hole, Wyoming, August 27, 2010.Google Scholar
Bernanke, B., Gertler, M. and Gilchrist, S. (1999) The financial accelerator in a quantitative business cycle framework. In: Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, pp. 1341–1393. Elsevier.CrossRefGoogle Scholar
Bernanke, B. S. (2018) The real effects of disrupted credit: Evidence from the global financial crisis. Brookings Papers on Economic Activity 49(2 (Fall)), 251–342.CrossRefGoogle Scholar
Bjoernland, H. and Leitemo, K. (2009) Identifying the interdependence between US monetary policy and the stock market. Journal of Monetary Economics 56(2), 275–282.CrossRefGoogle Scholar
Bobeica, E. and Jarocinski, M. (2017) Missing disinflation and missing inflation: The puzzles that aren’t. ECB Research Bulletin 30, 1–5.Google Scholar
Bobeica, E. and Jarocinski, M. (2019) Missing disinflation and missing inflation: A VAR perspective. International Journal of Central Banking 15(1), 199–232.Google Scholar
Busch, U., Scharnagl, M. and Scheithauer, J. (2010) Loan Supply in Germany During the Financial Crisis. Deutsche Bundesbank Discussion Paper, 2010/05.CrossRefGoogle Scholar
Caldara, D., Fuentes-Albero, C., Gilchrist, S. and ZakrajŠek, E. (2016) The macroeconomic impact of financial and uncertainty shocks. European Economic Review 88(C), 185–207.CrossRefGoogle Scholar
Canova, F., Gambetti, L. and Pappa, E. (2007) The structural dynamics of output growth and inflation: Some international evidence. Economic Journal 17(519), C167–C191.CrossRefGoogle Scholar
Carlstrom, C. T., Fuerst, T. S., Ortiz, A. and Paustian, M. (2014) Estimating contract indexation in a Financial Accelerator Model. Journal of Economic Dynamics and Control 46(C), 130–149.CrossRefGoogle Scholar
Carlstrom, C. T., Fuerst, T. S. and Paustian, M. (2016) Optimal contracts, aggregate risk, and the financial accelerator. American Economic Journal: Macroeconomics 8(1), 119–147.Google Scholar
Castelnuovo, E. (2012) Testing the structural interpretation of the price puzzle with a cost-channel model. Oxford Bulletin of Economics and Statistics 74(3), 425–452.CrossRefGoogle Scholar
Castelnuovo, E. and Surico, P. (2010) Monetary policy, inflation expectations and the price puzzle. Economic Journal 120(549), 1262–1283.CrossRefGoogle Scholar
Christiano, L., Motto, R. and Rostagno, M. (2010) Financial Factors in Economic Fluctuations. ECB Working Paper, 1192.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. S. and Trabandt, M. (2014) Understanding the Great Recession. NBER Working Papers 20040, National Bureau of Economic Research, Inc.CrossRefGoogle Scholar
Coibion, O. and Gorodnichenko, Y. (2015) Is the Phillips Curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics 7(1), 197–232.Google Scholar
Conti, A., Neri, S. and Nobili, A. (2015) Why is Inflation so Low in the Euro Area? Temi di discussione (Economic Working Papers), Bank of Italy, Economic Research and International Relations Area, 1019.CrossRefGoogle Scholar
Covas, J. and Driscoll, J. (2013) The macroeconomic impact of adding liquidity regulations to bank capital regulations. Federal Reserve Bank of San Francisco, mimeo.Google Scholar
Curdia, V. and Woodford, M. (2010) Credit spreads and monetary policy. Journal of Money, Credit and Banking 42(s1), 3–35.CrossRefGoogle Scholar
De Fiore, F. and Tristani, O. (2013) Optimal monetary policy in a model of the credit channel. Economic Journal 123(571), 906–931.CrossRefGoogle Scholar
De NicolÒ, G. and Lucchetta, M. (2011) Systemic risks and the macroeconomy. In: Quantifying Systemic Risk, NBER Chapters, pp. 113–148. National Bureau of Economic Research, Inc.CrossRefGoogle Scholar
De Santis, R. and Darracq-Paries, M. (2015) A non-standard monetary policy shock: The ECB’s 3-year LTROs and the shift in credit supply. Journal of International Money and Finance 54(1), 1–34.Google Scholar
Del Negro, M., Giannoni, M. and Schorfheide, F. (2015) Inflation in the great recession and New Keynesian models. American Economic Journal: Macroeconomics 7(1), 168–196.Google Scholar
Edge, R. and Meisenzahl, R. (2011) The unreliability of credit-to-GDP ratio gaps in real time: Implications for countercyclical capital buffers. International Journal of Central Banking 7(4), 261–298.Google Scholar
Eickmeier, S., Metiu, N. and Prieto, E. (2016) Time-Varying Volatility, Financial Intermediation and Monetary Policy. CAMA Working Papers, 2016-32.Google Scholar
Eickmeier, S. and Ng, T. (2015) How do US credit supply shocks propagate internationally? A GVAR approach. European Economic Review 74, 128–145.CrossRefGoogle Scholar
Fernald, J. (2012) A Quarterly, Utilization-Adjusted Series on Total Factor Productivity. FRBSF Working Paper, 2012-19.CrossRefGoogle Scholar
FernÁndez-Villaverde, J., GuerrÓn-Quintana, P. A., Kuester, K. and Rubio-RamÍrez, J. (2015) Fiscal volatility shocks and economic activity. American Economic Review 105(11), 3352–84.CrossRefGoogle Scholar
Fornari, F. and Stracca, L. (2012) What does a financial shock do? first international evidence. Economic Policy 27(71), 407–455.CrossRefGoogle Scholar
Fry-McKibbin, R. and Zheng, J. (2016) Effects of us monetary policy shocks during financial crises - a threshold vector autoregression approach. Applied Economics 48(59), 5802–5823.CrossRefGoogle Scholar
Furlanetto, F., Ravazzolo, F. and Sarferaz, S. (2017) Identification of financial factors in economic fluctuations. Economic Journal 129(617), 311–337.CrossRefGoogle Scholar
Gaiotti, E. and Secchi, A. (2006a) Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2000 firms. Journal of Money, Credit and Banking 38(8), 2013–2037.CrossRefGoogle Scholar
Gambetti, L. and Musso, A. (2017) Loan supply shocks and the business cycle. Journal of Applied Econometrics 32(4), 764–782.CrossRefGoogle Scholar
Gelain, P., Lansing, K. J. and Natvik, G. J. (2017) Leaning against the credit cycle. Journal of the European Economic Association 16(5), 1350–1393.CrossRefGoogle Scholar
Gerali, A., Neri, S., Sessa, L. and Signoretti, F. M. (2010) Credit and banking in a DSGE model of the euro area. Journal of Money, Credit and Banking 42(s1), 107–141.CrossRefGoogle Scholar
Gertler, M. and Karadi, P. (2011) A model of unconventional monetary policy. Journal of Monetary Economics 58(1), 17–34.CrossRefGoogle Scholar
Gertler, M. and Karadi, P. (2015). Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics 7(1), 44–76.Google Scholar
Gilchrist, S., Schoenle, R., Sim, J. and ZakrajŠek, E. (2017) Inflation dynamics during the financial crisis. American Economic Review 107(3), 785–823.CrossRefGoogle Scholar
Gilchrist, S. and ZakrajŠek, E. (2012) Credit spreads and business cycle fluctuations. Amerian Economic Review 102(4), 1692–1720.CrossRefGoogle Scholar
Hall, R. (2011) The long slump. American Economic Review 101(2), 431–469.CrossRefGoogle Scholar
Helbling, T., Huidrom, R., Kose, M. and Otrok, C. (2011a) Do credit shocks matter? A global perspective. European Economic Review 55(3), 340–353.CrossRefGoogle Scholar
Hristov, N. and Huelsewig, O. (2017) Unexpected loan losses and bank capital in an estimated DSGE model of the Euro area. Journal of Macroeconomics 54(B), 161–186.CrossRefGoogle Scholar
Hristov, N., Huelsewig, O. and Wollmershaeuser, T. (2012) Loan supply shocks during the financial crisis: Evidence for the euro area. Journal of International Money and Finance 31(3), 569–592.CrossRefGoogle Scholar
Hubrich, K. and Tetlow, R. (2015) Financial stress and economic dynamics: the transmission of crises. Journal of Monetary Economics 70, 100–115.CrossRefGoogle Scholar
Iacoviello, M. (2015) Financial business cycles. Review of Economic Dynamics 18(1), 140–164.CrossRefGoogle Scholar
Jurado, K., Ludvigson, S. and Ng, S. (2015) Measuring uncertainty. American Economic Review 105(3), 1177–1216.CrossRefGoogle Scholar
Khan, A. and Thomas, J. (2013) Credit shocks and aggregate fluctuations in an economy with production heterogeneity. Journal of Political Economy 121(6), 1055–1107.CrossRefGoogle Scholar
Kim, C. and Nelson, C. (1999) Has the US economy become more stable? A Bayesian approach based on a Markov Switching model of the business cycle. The Review of Economics and Statistics 81(4), 608–616.CrossRefGoogle Scholar
Kohn, D. (2010) The Federal Reserve’s Policy Actions during the Financial Crisis and Lessons for the Future. Speech at the Carleton University, Ottawa, Canada, May 13, 2010.Google Scholar
Krippner, L. (2015) Zero Lower Bound Term Structure Modeling: A Practitioner’s Guide. Palgrave-Macmillan, New York.CrossRefGoogle Scholar
Leduc, S. and Liu, Z. (2016) Uncertainty shocks are aggregate demand shocks. Journal of Monetary Economics 82(C), 20–35.CrossRefGoogle Scholar
Lhuissier, S. (2017) Financial intermediaries’ instability and euro area macroeconomic dynamics. European Economic Review 98(C), 49–72.CrossRefGoogle Scholar
Linde, J. and Trabandt, M. (2019) Resolving the Missing Deflation Puzzle. CEPR Discussion Paper, 13690.Google Scholar
Ludvigson, S., Ma, S. and Ng, S. (2020) Shock Restricted Structural Vector-Autoregression. NBER Working Paper, 23225.Google Scholar
Ludvigson, S., Ma, S. and Ng, S. (forthcoming) Uncertainty and business cycle: Exogenous impulse or endogenous response. American Economic Journal: Macroeconomics.Google Scholar
Mazumder, S. and Ball, L. M. (2011) Inflation Dynamics and the Great Recession. IMF Working Papers 11/121, International Monetary Fund.CrossRefGoogle Scholar
McConell, M. and Perez-Quiros, G., (2000) Output fluctuations in the United States: What has changed since the early 1980s? American Economic Review 90(5), 1464–1476.CrossRefGoogle Scholar
Meeks, R. (2012) Do credit market shocks drive output fluctuations? evidence from corporate spreads and defaults. Journal of Economic Dynamics & Control 36(4), 568–584.CrossRefGoogle Scholar
Meh, C. A. and Moran, K. (2010) The role of bank capital in the propagation of shocks. Journal of Economic Dynamics and Control 34(3), 555–576.CrossRefGoogle Scholar
Meyer, L. (2001) Before and after. Remarks before the National Association of Business Economics, St. Louis, Missouri, November 27, 2001.Google Scholar
Mumtaz, H., Pinter, G. and Theodoridis, K. (2018) What do VARs tell us about the impact of credit supply shock? International Economic Review 59(2), 625–646.CrossRefGoogle Scholar
Mumtaz, H. and Theodoridis, K. (2016) The changing transmission of uncertainty shocks in the US: An empirical analysis. Journal of Business & Economic Statistics 36(2), 239–252.CrossRefGoogle Scholar
Nakamura, E. and Steinsson, J. (2018) High-frequency identification of monetary non-neutrality: The information effect. The Quarterly Journal of Economics 133(3), 1283–1330.CrossRefGoogle Scholar
Nekarda, C. J. and Ramey, V. A. (2013) The Cyclical Behavior of the Price-Cost Markup. NBER Working Papers 19099, National Bureau of Economic Research, Inc.CrossRefGoogle Scholar
Paustian, M. (2007) Assessing sign restrictions. The B.E. Journal of Macoreconomics 7(1), 1–33.Google Scholar
Peersman, G. (2005) What caused the early millenium slowdown? Evidence based on vector autoregressions. Journal of Applied Econometrics 20(2), 185–207.CrossRefGoogle Scholar
Peersman, G. (2010) Macroeconomic consequences of different types of credit market disturbances and non-conventional monetary policy in the euro area. Mimeo, Ghent University.Google Scholar
Peersman, G. (2011) Bank Lending Shocks and the Euro Area Business Cycle. Working Papers of Faculty of Economics and Business Administration 11/766, Ghent University, Faculty of Economics and Business Administration.Google Scholar
Petrosky-Nadeau, N. (2013) TFP during a credit crunch. Journal of Economic Theory 148(3), 1150–1178.CrossRefGoogle Scholar
Prieto, E., Eickmeier, S. and Marcellino, M. (2016a) Time variation in macro-financial linkages. Journal of Applied Econometrics 31(7), 1215–1233.CrossRefGoogle Scholar
Primiceri, G. E. (2005) Time varying structural vector autoregressions and monetary policy. Review of Economic Studies 72(3), 821–852.CrossRefGoogle Scholar
Romer, C. D. and Romer, D. H. (2004) A new measure of monetary shocks: Derivation and implications. American Economic Review 94(4), 1055–1084.CrossRefGoogle Scholar
Van Zandweghe, W. (2019) The Phillips curve and the missing disinflation from the Great Recession. Kansas Fed Economic Review.CrossRefGoogle Scholar
Villa, S. (2016) Financial frictions in the Euro area and the United States: A Bayesian assessment. Macroeconomic Dynamics 20(5), 1313–1340.CrossRefGoogle Scholar
Walentin, K. (2014) Business cycle implications of mortgage spreads. Journal of Monetary Economics 67(C), 62–77.CrossRefGoogle Scholar
Wu, C. and Xia, F. (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking 48(2–3), 253–291.CrossRefGoogle Scholar
Yellen, J. (2013) Panel discussion on “Monetary policy: Many targets, many instruments. where do we stand?”. Technical report.Google Scholar
Yellen, J. (2015) Financial stability a decade after the onset of the crisis. Speech at the “Fostering a Dynamic Global Recovery” Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.Google Scholar