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The importance of the financial system for the real economy
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Statistics.
Swedish National Debt Office.
Ministry of Finance, Sweden.
2015 (English)Report (Other academic)
Abstract [en]

This paper analyses the importance of the nancial system for the real economy using a Bayesian VAR model for the macro economy, completed with financial variables, with priors on the steady states. The results suggest that i) a substantial part of the forecast error variance of GDPgrowth is attributed to shocks to the financial variables, indicating the importance of the financial system. ii) The suggested model produces an earlier and stronger signal regarding the probability of recession, compared to a model without financial variables. iii) Finally, and most striking, the augmented model's forecasts for 2008 and 2009, conditional on the development of the financial variables, clearly outperforms the macro model. Furthermore, this drastic improvement in modelling GDP during the crisis does not come at the expense of predictive power. In this respect, the augmented model performs as well as the standard macro model. Taken together, the results thus suggest that the proposed model presents an accessible possibility to analyse the macro-financial linkages and the GDP developments during a financial crisis.

Place, publisher, year, edition, pages
Working paper / Department of Statistics, Uppsala University, 2015:1
Keyword [en]
Transmission channels, Financial indicators, Macro economy, Business cycle, Credit cycle, Bayesian VAR
National Category
Research subject
URN: urn:nbn:se:uu:diva-244641OAI: oai:DiVA.org:uu-244641DiVA: diva2:789469
Available from: 2015-02-19 Created: 2015-02-19 Last updated: 2015-02-20Bibliographically approved

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