December 9, 2013

Financial Shocks and Economic Activity in the Netherlands

We analyse the effects of financial shocks on economic development in the euro area and the Netherlands in particular. We develop VAR models that take account of feedback loops between financial-market conditions and the real economy.
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These feedback loops operate via the aggregated euro-area level and affect the Dutch economy. Our empirical analysis is twofold as we analyse industry as well as GDP level data. Financial shocks are measured as shocks to corporate bond spreads and implied volatility. Bond-spread shocks are found to have direct consequences for real economic development, with a 25 basis points shock giving an effect on industrial production of -0.6% after one year, and -1.35% after four years. A pure volatility shock seems to imply only higher uncertainty about future developments. Applying these figures to the financial crisis of 2008 shows that the model under predicts the negative effects of the crisis.

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Peter Broer Read more