Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/204921 
Year of Publication: 
2018
Series/Report no.: 
Discussion Papers No. 18-21
Publisher: 
University of Bern, Department of Economics, Bern
Abstract: 
This paper studies the propagation and properties of a confidence shock in a structural vector autoregression (VAR) model with and without financial variables. The addition of a financial block does not considerably change the propagation and the contribution to the forecast error variance by the confidence shock. Nevertheless, for specific historical episodes, the inclusion of a financial block plays a role. In several recessions, the VAR with the financial block assigns a smaller role to confidence shocks for the fall in GDP. This suggests that the confidence shock may not be properly identified in a structural VAR when financial variables are omitted. Further, I identify a financial channel by which the confidence shock affects economic activity.
Subjects: 
Confidence shocks
structural VARs
financial channel
JEL: 
C32
E32
E44
Document Type: 
Working Paper

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