Financial shocks explain ‘large share’ of US business cycle – BoE paper
New identification method helps avoid pitfalls encountered by earlier research, author says
Financial shocks drive around a third of US business cycle fluctuations, a working paper published by the Bank of England finds.
In Financial stress and the debt structure, David Gauthier presents a new identification method to help avoid “pitfalls” in separating financial shocks and real economic cycles. “Financial variables are pro-cyclical and forward-looking, making it arduous to separate financial shocks from economic cycles with standard recursive identification schemes,” he writes.
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