The Department of Economics Macroeconomics and Econometrics Seminar Series present

"Financial Stress and Economic Dynamics: The Transmission of Crises"
with Kirstin Hubrich, Senior Economist, European Central Bank

Tuesday, April 30, 2013
3:30-5:00 p.m.
Social Science Plaza B, Room 3218

The recent financial crisis and the associated decline in economic activity have raised some important questions about economic activity and its links to the financial sector. Hubrich introduces an index of financial stress--an index that was used in real time by the staff of the Federal Reserve Board to monitor the crisis--and shows how stress interacts with real activity, inflation and monetary policy. She defines a stress event--a period affected by stress in both shock variances and model coefficients--and describes how financial stress affects macroeconomic dynamics. She also examines what constitutes a useful and credible measure of stress and the role of monetary policy. She addresses these questions using a richly parameterized Markov-switching VAR model, estimated using Bayesian methods. Her results show that allowing for time variation is important: the constant-parameter, constant-shock-variance model is a poor characterization of the data. She finds that periods of high stress coefficients in general, and stress events in particular, line up well with financial events in recent U.S. history. She finds that a shift to a stress event is highly detrimental to the outlook for the real economy, and that conventional monetary policy is relatively weak during such periods. Finally, she argues that the findings have implications for DSGE modeling of financial events insofar as researchers wish to capture phenomena more consequential than garden-variety business cycle fluctuations, pointing away from linearized DSGE models toward either MS-DSGE models or fully nonlinear models solved with global methods.

For further information, please contact Gloria Simpson, or 949-824-5788.

© UC Irvine School of Social Sciences - 3151 Social Sciences Plaza, Irvine, CA 92697-5100 - 949.824.2766