Exploring Interactions between Real Activity and the Financial Stance
Journal of Financial Stability, Vol. 1, No. 3, pp. 308-341, April 2005
Posted: 11 Jan 2005
In this paper we empirically study interactions between real activity and the financial stance. Using aggregate data we examine a number of candidate measures of the financial stance of the economy. We find strong evidence for substantial spillover effects on aggregate activity from our preferred measure. Given this result, we use a large micro data-set for corporate firms to develop a macro-micro model of the interaction between the financial and real economy. This approach implies that the impulse responses of a given aggregate shock will depend on the portfolio structure of firms at any given point in time.
Keywords: Default risk models, business cycles, price stability, financial stability, financial and real interaction
JEL Classification: C41, G21, G33, G38
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