, Volume 42, Issue 3, pp 571–595 | Cite as

Euro area financial shocks and economic activity in The Netherlands

Original Paper


We analyze the effects of shocks on financial markets on economic development in the Euro area and the Netherlands in particular. We develop a VAR model that takes account of feedback loops between financial market conditions and the real economy. These feedback loops operate via the aggregated Euro area level for the real economy as well as financial markets and affect the Dutch economy. Our empirical analysis considers industry data for the Euro area and the Dutch economy. Shocks on financial markets are measured as shocks to corporate bond spreads and implied volatility. For shock identification, we employ a recently proposed decomposition of the forecast error variance combined with an ordering perturbation in our VAR. Bond spread shocks are found to have severe consequences for real economic development independently whether they are accompanied by shocks to volatility. Shocks to volatility seem to imply only severe effects for parts of the real economy if they are accompanied by bond spread shocks.


Financial crisis Financial shocks Finance and real economic activity 

JEL Classification

G15 G01 F36 



We would like to thank two anonymous referees, Gabriele Galati, members of the CPB, the Dutch Ministries of Economic Affairs, Finance and Social and Labor Affairs as well as the Nederlandsche Bank for very helpful comments. Especially, we would like to thank the Ministry of Economic Affairs for supporting this project. All remaining errors are our own.


  1. Aghion P, Bacchetta P, Banerjee A (2001) Currency crises and monetary policy in an economy with credit constraints. Eur Econ Rev 45(7):1121–1150CrossRefGoogle Scholar
  2. Aghion P, Bacchetta P, Banerjee A (2004a) A corporate balance-sheet approach to currency crises. J Econ Theory 119(1):6–30CrossRefGoogle Scholar
  3. Aghion P, Bacchetta P, Banerjee A (2004b) Financial development and the instability of open economies. J Monet Econ 51(6):1077–1106CrossRefGoogle Scholar
  4. Altunbaş Y, Fazylov O, Molyneux P (2002) Evidence on the bank lending channel in Europe. J Bank Financ 26(11):2093–2110CrossRefGoogle Scholar
  5. Amiti M, Weinstein D (2011) Exports and financial shocks. Q J Econ 126(4):1841–1877CrossRefGoogle Scholar
  6. Antony J, Klarl T, Maußner A (2012) Supranational and national shock absorption policies: financial shocks and german industrial production, mimeo, CPB and University of AugsburgGoogle Scholar
  7. Bańbura M, Giannone D, Reichlin L (2010) Large Bayesian vector auto regressions. J Appl Econom 25(1):71–92CrossRefGoogle Scholar
  8. Beaton K, Desroches B (2011) Financial spillovers across countries: the case of Canada and the United States, Discussion Paper 2011-1, Bank of CanadaGoogle Scholar
  9. Bernanke BS, Lown CS (1991) The credit crunch. Brook Pap Econ Act 2:205–239CrossRefGoogle Scholar
  10. Bernanke BS, Gertler M, Gilchrist S (1996) The financial accelerator and the flight to quality. Rev Econ Stat 78(1):1–15CrossRefGoogle Scholar
  11. Bernanke BS, Gertler M, Gilchrist S (1999) The financial accelerator in a quantitative business cycle framework. In: Taylor JB, Woodford M (eds) Handbook of macroeconomics, 1st edn, vol. 1C, chap. 21. Elsevier, pp 1341–1393Google Scholar
  12. Bloom N (2009) The impact of uncertainty shocks. Econometrica 77(3):623–685CrossRefGoogle Scholar
  13. Bloom N, Bond S, van Reenen J (2007) Uncertainty and investment dynamics. Rev Econ Stud 74(2):391–415CrossRefGoogle Scholar
  14. Boissay F (2006) Credit chains and the propagation of financial distress, Working Paper Series 573, ECBGoogle Scholar
  15. Bussiére M, Chudik A, Mehl A (2011) Does the Euro make a difference? Spatiotemporal transmission of global shocks to real effective exchange rates in an infinite var, ECB Working Paper 1292, ECBGoogle Scholar
  16. Caballero RJ, Krishnamurthy A (2001) International and domestic collateral constraints in a model of emerging market crises. J Monet Econ 48(3):513–548CrossRefGoogle Scholar
  17. Caballero RJ, Krishnamurthy A (2003) Excessive dollar debt: Financial development and underinsurance. J Financ 58(2):867–893CrossRefGoogle Scholar
  18. Cagetti M (2003) Wealth accumulation over the life cycle and precautionary savings. J Bus Econ Stat 21(3):339–353CrossRefGoogle Scholar
  19. Caruana J (2010) Macroprudential policy: working towards a new consensus, remarks at the high-level meeting on the emerging framework for financial regulation and monetary policy jointly organised by the bis financial stability institute and the imf institute, washington, 23 April 2010, Tech. rep., BIS and IMF InstituteGoogle Scholar
  20. Casella G (2001) Empirical bayes gibbs sampling. Biostatistics 2(4):485–500CrossRefGoogle Scholar
  21. Chen Q, Gray D, NDiaye H, Oura P, Tamirisa N (2010) International transmission of bank and corporate distress, IMF Working Paper 10/124, IMFGoogle Scholar
  22. Chiu CW, Eraker B, Foerster AT, Kim TB, Seoane HD (2011) Estimating VAR’s sampled at mixed or irregular spaced frequencies: a Bayesian approach, Research Working Paper RW 11–11, Federal Reserve Bank of Kansas CityGoogle Scholar
  23. Chudik A, Fratzscher M (2011) Identifying the global transmission of the 2007–2009 financial crisis in a GVAR model. Eur Econ Rev 55:325–339CrossRefGoogle Scholar
  24. Cooley TF, Quadrini V (2006) Monetary policy and the financial decisions of firms. Econ Theory 27(1):243–270CrossRefGoogle Scholar
  25. Eickmeier S, Ng T (2011) How do credit supply shocks propagate internationally? A GVAR approach, CEPR Discussion Paper 8720, CEPRGoogle Scholar
  26. Faust J, Gilchrist S, Wright JH, Zakrajsek E (2011) Credit spreads as predictors of real-time economic activity: a Bayesian model-averaging approach, NBER Working Paper 16725, NBERGoogle Scholar
  27. Fazzari SM, Hubbard RG, Petersen BC (1988) Financing constraints and corporate investment. Brook Pap Econ Act 1:141–206CrossRefGoogle Scholar
  28. Fornari F, Stracca L (2013) What does a financial shock do? First international evidence, Working Paper 1522, ECBGoogle Scholar
  29. Fostel A, Geanakoplos J (2008) Leverage cycles and the anxious economy. Am Econ Rev 98(4):1211–1244CrossRefGoogle Scholar
  30. Galesi A, Sgherri S (2009) Regional financial spillovers across Europe: a global VAR analysis, IMF Working Paper 09/23, IMFGoogle Scholar
  31. Ghysels E (2012) Macroeconomics and the reality of mixed frequency data, mimeo. Department of Economics, University of North CarolinaGoogle Scholar
  32. Giannone D, Lenza M, Primiceri GE (2012) Prior selection for vector autoregressions, NBER Working Paper 18467, NBERGoogle Scholar
  33. Gilchrist S, Yankov V, Zakrajšek E (2009) Credit market shocks and economic fluctuations: evidence from corporate bond and stock markets. J Monet Econ 56(4):471–493CrossRefGoogle Scholar
  34. Gilchrist S, Sim J, Zakrajsek E (2010) Uncertainty, financial frictions and investment, mimeo, Boston University and Federal Reserve BoardGoogle Scholar
  35. Gilchrist S, Zakrajsek E (2008) Linkages between the financial and the real sectors, mimeo, Federal Reserve BoardGoogle Scholar
  36. Gilchrist S, Zakrajsek E (2012) Credit spreads and business cycle fluctuations. Am Econ Rev 102(4):1692–1720CrossRefGoogle Scholar
  37. Gilchrist S, Zakrajsek E, Albero CF, Caldara D (2013) On the identification of financial and uncertainty shocks, Meeting Papers 965, Society for Economic DynamicsGoogle Scholar
  38. Gourinchas PO, Parker JA (2002) Consumption over the life cycle. Econometrica 70:47–89CrossRefGoogle Scholar
  39. Kiyotaki N, Moore J (1997) Credit cycles. J Polit Econ 105(2):211–248CrossRefGoogle Scholar
  40. Kyle AS, Xiong W (2001) Contagion as a wealth effect. J Financ 56(4):1401–1440CrossRefGoogle Scholar
  41. Lorenzoni G (2008) Inefficient credit booms. Rev Econ Stud 75(3):809–833CrossRefGoogle Scholar
  42. Manova K (2008) Credit constraints, heterogeneous firms and international trade, NBER Working Paper 14531, NBERGoogle Scholar
  43. Matsuyama K (2007) Credit traps and credit cycles. Am Econ Rev 97(1):503–516CrossRefGoogle Scholar
  44. Mody A, Taylor MP (2004) Financial predictors of real activity and the financial accelerator. Econ Lett 82:167–172CrossRefGoogle Scholar
  45. Paasche B (2001) Credit constraints and international financial crises. J Monet Econ 48(3):623–650CrossRefGoogle Scholar
  46. Peek J, Rosengren E (1995) The capital crunch: neither a borrower nor a lender be. J Money Credit Bank 27(3):625–638CrossRefGoogle Scholar
  47. Schneider M, Tornell A (2004) Balance sheet effects, bailout guarantees and financial crises. Rev Econ Stud 71(3):883–913CrossRefGoogle Scholar
  48. Schorfheide F, Song D (2013) Real-time forecasting with a mixed-frequency VAR, NBER Working Papers 19712, NBERGoogle Scholar
  49. Thakor AV (1996) Capital requirements, monetary policy, and aggregate bank lending: theory and empirical evidence. J Financ 51(1):279–324CrossRefGoogle Scholar
  50. Uhlig H (2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. J Monet Econ 52(2):381–419CrossRefGoogle Scholar
  51. Xu T (2010) The role of credit in international business cycles, Tech. rep., mimeoGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.CPB Netherlands Bureau for Economic Policy AnalysisThe HagueThe Netherlands
  2. 2.Pforzheim UniversityPforzheimGermany

Personalised recommendations