Identification of Financial Factors in Economic
Fluctuations
Francesco Furlanetto
Norges Bank
Francesco Ravazzolo
Norges Bank and BI Norwegian Business School
Samad Sarferaz
ETH Zürich
September 29, 2015
Danmarks Nationalbank’s workshop on ”The financial sector and the macro
economy”
The views expressed in the paper are not necessarily the views of Norges Bank
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
1 / 19
Motivation
Recently, the financial sector has been seen also as a source of shocks
(Christiano, Motto and Rostagno, 2014, Jermann and Quadrini, 2012)
Several kinds of financial shocks, all implying investment and stock market
booms
In this paper we consider financial shocks in a sign restricted VAR (Sims,
1980)
First step: one general financial shock
Second step: disentangle different financial shocks
Contribution
Credit shocks, housing shocks and uncertainty shocks in the same framework
Size of the system and magnitude restrictions with restrictions on ratios
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
2 / 19
The model
Bayesian VAR in levels with 5 lags
Minimum set of sign restrictions imposed only on impact
5 variables (output, GDP deflator, interest rate, investment, stock returns) in
the baseline
5 shocks: supply and four kinds of demand shocks in the baseline
Data: 1985 Q1-2011 Q4 quarterly for the US
Priors: Uninformative priors.
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
3 / 19
Restrictions in the baseline model
Financial shocks create an investment boom and a stock market boom
(consistent with all financial shocks in the literature)
Shocks to the demand of capital
Theory: investment shocks move output and stock prices in opposite
directions
Shocks to the supply of capital (Christiano, Motto and Rostagno, 2014)
Restrictions:
GDP
GDP deflator
Interest rate
Investment/Output
Stock market
Furlanetto Ravazzolo Sarferaz
Supply
+
NA
NA
NA
Demand
+
+
+
NA
Monetary
+
+
NA
NA
Identification of Financial Factors
Investment
+
+
+
+
-
Financial
+
+
+
+
+
September 2015
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Variance Decomposition
GDP
Inflation
1
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
1
5
10
15
20
25
30
35
0
1
5
10
Interest Rate
1
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
1
5
10
15
20
15
20
25
30
35
25
30
35
Investment
25
30
35
0
1
5
10
15
20
Stock Prices
1
Supply
Demand
Monetary
Investment
Financial
0.8
0.6
0.4
0.2
0
1
5
10
Furlanetto Ravazzolo Sarferaz
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20
25
30
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Identification of Financial Factors
September 2015
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IRF financial shocks
−3
−3
GDP
x 10
3
6
2
4
1
2
0
0
−1
−2
1
5
10
15
20
Inflation
x 10
8
25
30
35
−2
1
5
10
Interest Rate
0.03
0.4
0.02
0.2
0.01
0
0
1
5
10
15
20
20
25
30
35
25
30
35
Investment
0.6
−0.2
15
25
30
35
30
35
−0.01
1
5
10
15
20
Stock Prices
0.015
0.01
0.005
0
−0.005
−0.01
1
5
10
Furlanetto Ravazzolo Sarferaz
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20
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Identification of Financial Factors
September 2015
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Next step: disentangling financial shocks
Our financial shock is consistent with several possible stories
Originating in the housing market? (housing demand shocks as in Iacoviello
and Neri (2009), Liu, Wang and Zha (2013); bubbles; decline in productivity
in the housing sector)
Originating in the credit markets? (loan to value ratio shocks, financial
liberalization, credit supply shocks)
Uncertainty (risk) shocks? (Bloom, 2009, Christiano, Motto and Rostagno,
2014)
Our next objective: disentangle different kind of financial shocks
we remove the monetary shock from the system to include more financial
shocks
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
7 / 19
Disentangling financial shocks I: credit vs housing
Credit
Real Estate Value
Credit shocks have a larger effect on the numerator
Limited response of house prices to credit shocks
Housing shocks have a larger effect on the denominator
Sluggish response of credit
No endogenous relaxation of credit standards
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
8 / 19
Variance decomposition
GDP
Prices
1
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0
1
5
10
15
20
25
30
35
0
1
5
Investment
1
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
1
5
10
15
15
20
25
30
35
25
30
35
Stock Prices
1
0
10
20
25
30
35
0
1
5
10
15
20
Credit to Real Estate Ratio
1
0.8
Supply
Demand
Investment
Credit
Housing
0.6
0.4
0.2
0
1
5
10
15
20
Furlanetto Ravazzolo Sarferaz
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Identification of Financial Factors
September 2015
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IRF housing
−3
−3
GDP
x 10
Prices
x 10
10
4
3
5
2
1
0
0
−5
1
5
10
15
20
25
30
35
−1
1
5
10
Investment
15
20
25
30
35
25
30
35
Stock Prices
0.04
0.02
0.01
0.02
0
0
−0.01
−0.02
1
5
10
15
20
25
30
35
30
35
−0.02
1
5
10
15
20
Credit to Real Estate Ratio
0.02
0.01
0
−0.01
−0.02
−0.03
1
5
10
15
20
Furlanetto Ravazzolo Sarferaz
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Identification of Financial Factors
September 2015
10 / 19
IRF credit
−3
GDP
2
0.005
1
0
0
−0.005
−1
−0.01
1
5
10
15
20
Prices
x 10
0.01
25
30
35
−2
1
5
10
Investment
15
20
25
30
35
25
30
35
Stock Prices
0.04
0.015
0.01
0.02
0.005
0
0
−0.02
−0.04
−0.005
1
5
10
15
20
25
30
35
30
35
−0.01
1
5
10
15
20
Credit to Real Estate Ratio
0.04
0.02
0
−0.02
−0.04
1
5
10
15
20
Furlanetto Ravazzolo Sarferaz
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Identification of Financial Factors
September 2015
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Cross-check: the slow-moving nature of credit
GDP
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
5
Prices
10 15 20 25 30 35
Investment
1 5 10 15 20 25 30 35
New Credit to Real Estate Ratio
1
5
10 15 20 25 30 35
Furlanetto Ravazzolo Sarferaz
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
5
10 15 20 25 30 35
Stock Market
1
5
10 15 20 25 30 35
Supply
Demand
Investment
Credit
Housing
Identification of Financial Factors
September 2015
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The interpretation of housing shocks
Housing demand shocks (Iacoviello and Neri, 2010)
Bubbles
Low productivity in the construction sector (Galesi, 2014)
Global saving glut
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
13 / 19
Disentangling financial shocks II: uncertainty vs credit vs
housing
EBP
VIX
Positive credit shocks and positive uncertainty shocks both lower EBP and
VIX...
...but EBP responds more to credit shocks
...and VIX responds more to uncertainty shocks
Similar to Caldara, Fuentes-Albero, Gilchrist and Zakrajsek (2014)
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
14 / 19
Variance Decomposition
GDP
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
1
1
5
5
5
Prices
10
15
20
Investment
25
30
10
15
20
25
30
Credit to real estate ratio
10
15
20
25
30
35
35
35
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
0.8
0.6
0.4
0.2
0
1
5
10
15
20
Stock Prices
25
30
35
1
5
10
15
EBP
20
25
30
35
1
5
10
20
25
30
35
15
VIX
1
0.8
0.6
0.4
0.2
0
1
5
10
15
20
Furlanetto Ravazzolo Sarferaz
25
30
35
Supply
Demand
Investment
Housing
Credit
Uncertainty
Residual
Identification of Financial Factors
September 2015
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IRF credit shock
−3
−3
GDP
x 10
Prices
x 10
10
5
5
0
0
−5
1
5
10
15
20
25
30
35
−5
1
5
10
Investment
0.02
0
0
−0.05
1
5
10
15
20
15
20
25
30
35
25
30
35
25
30
35
Stock Prices
0.05
25
30
35
−0.02
1
5
10
15
Credit to real estate ratio
20
EBP
0.02
0.2
0
0
−0.02
−0.04
1
5
10
15
20
25
30
35
30
35
−0.2
1
5
10
15
20
VIX
0.2
0
−0.2
1
5
10
Furlanetto Ravazzolo Sarferaz
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Identification of Financial Factors
September 2015
16 / 19
IRF uncertainty shock
−3
GDP
Prices
x 10
0.01
2
0
0
−2
−0.01
1
5
10
15
20
25
30
35
−4
1
5
10
Investment
15
20
25
30
35
25
30
35
25
30
35
Stock Prices
0.05
0.02
0.01
0
0
−0.05
1
5
10
15
20
25
30
35
−0.01
1
5
10
15
Credit to real estate ratio
20
EBP
0.04
0.2
0.02
0
0
−0.02
1
5
10
15
20
25
30
35
30
35
−0.2
1
5
10
15
20
VIX
0.2
0
−0.2
1
5
10
Furlanetto Ravazzolo Sarferaz
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Identification of Financial Factors
September 2015
17 / 19
IRF housing shock
−3
GDP
10
0.01
5
0
0
−0.01
−5
1
5
10
15
20
Prices
x 10
0.02
25
30
35
1
5
10
Investment
0.02
0
0
−0.1
1
5
10
15
20
15
25
30
35
−0.02
1
5
10
15
Credit to real estate ratio
0.2
0
0
1
5
10
15
20
25
30
35
25
20
25
30
35
25
30
35
EBP
0.05
−0.05
20
Stock Prices
0.1
30
35
30
35
−0.2
1
5
10
15
20
VIX
0.2
0
−0.2
1
5
10
Furlanetto Ravazzolo Sarferaz
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Identification of Financial Factors
September 2015
18 / 19
Conclusion
We have identified (several) financial shocks in a sign restricted VAR
Financial shocks are important
Financial shocks are non-inflationary
Interpretation of financial shocks: support for housing shocks
No support for uncertainty shocks and VIX is not driven by only one shock
Furlanetto Ravazzolo Sarferaz
Identification of Financial Factors
September 2015
19 / 19