Credit, output and financial stress: A non‐linear LVSTAR application to Brazil
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neves2022 - p. 906
We harmonize the frequency by taking the value of the first month of each quarter. The index captures whether a country is under financial stress or not. It has five main components: (i) A crisis risk measure for the banking sector; (ii) Stock market return; (iii) Stock market volatility; (iv) Sovereign debt spreads; and (v) Exchange rate and international reserves variation.
neves2022 - p. 913
A negative shock in credit depresses economic activity and widens the output gap. Figure 4 shows that the output gap is between 0.4 and 0.6 percentage points (p.p.) wider at the end of simulations. The adverse reaction, however, is not immediate, taking 5 to 8 periods to happen. There is a slight rebound in the later periods, but insufficient to bring the economy to initial conditions. Furthermore, the adverse reaction is worse and occurs earlier when financial stress increases.
neves2022 - p. 918
We test for Granger causality to obtain evidence of statistical precedence of credit growth over output movements. We interpret this in light of the roles of banking systems in both conventional and heterodox literature on real-financial interactions. It supports the models in which the easiness and tightness in lending conditions plays a decisive role in economic expansions and contractions, as opposed to the models where the banking sector has a limited, passive role. For the Brazilian economy, that also implies the relevance of credit conditions—market expectations, capital inflow, and institutional developments—for understanding economic expansions.