Econometric Research and Special Studies Department

Corporate Credit, Stock Price Inflation and Economic Fluctuations

J.J.J. Groen

Research Memorandum WO&E no. 651

March 2001

De Nederlandsche Bank
CORPORATE CREDIT, STOCK PRICE INFLATION AND ECONOMIC FLUCTUATIONS

J.J.J. Groen

This paper has benefited from discussions with Maarten van Rooij, Peter Vlaar and Peter van Els. Re-
search assistance by Claudia Kerkhoff is gratefully acknowledged.

De Nederlandsche Bank NV
Econometric Research and
Special Studies Department
Research Memorandum WO&E no. 651/0106 P.O. Box 98
1000 AB AMSTERDAM
March 2001 The Netherlands
 ABSTRACT

Corporate Credit, Stock Price Inflation and Economic Fluctuations

J.J.J. Groen

We analyze in this paper the empirical interaction between real corporate credit, real income, real stock
prices, the short-term interest rate and inflation for the Netherlands and the United States. The framework
is based on a five-variable vector error correction model with economically based restrictions upon the
cointegrating vectors. Structure is imposed on the vector error correction model in order to identify
the permanent and temporary shocks within the system and we use impulse response functions and
forecast error variance decompositions to analyze the interdependencies between the aforementioned
variables. Erratic shocks in the real amount of corporate credit and in stock prices could potentially have
some impact on inflation in the case of United States and on real output in the Netherlands. However,
our structural VAR analysis also shows that the above mentioned erratic shocks only explain a small
proportion of the variation in inflation and economic activity, and inflation objective shifts and supply
side shocks are much more important determinants for economic fluctuations.

Keywords: Corporate credit, stock prices, vector error correction models, impulse response functions.

JEL Codes: G32

SAMENVATTING

Bedrijfskredieten, Aandelenprijsinflatie en Economische Fluctuaties

J.J.J. Groen

In dit rapport wordt het empirische verband tussen reële bedrijfskredieten, reëel inkomen, reële aan-
delenprijzen, de korte rente en de inflatie geanalyseerd voor Nederland en de Verenigde Staten. De
gehanteerde methodologie is baseerd op een vector error correction model met vijf variabelen waarbij
de co-integratie vectoren economisch valide restricties hebben. Om permanente en tijdelijke schokken
binnen een dergelijk systeem te kunnen identificeren wordt er structuur opgelegd binnen onze vector
error correction modellen. Op basis van impulse response functies en decomposities van voorspelfout
varianties analyseren we vervolgens de empirische interactie tussen onze vijf reeksen. Ongefundeerde
schokken in reële bedrijfskredieten en aandelenprijzen kunnen potentieel de inflatie in de Verenigde Sta-
ten beïnvloeden en hetzelfde geldt voor de invloed op het nationaal inkomen in Nederland. Op basis
van de structurele VAR analyse kan men echter ook concluderen dat dergelijke ongefundeerde schokken
maar een klein gedeelte van de fluctuaties in de inflatie en het nationaal inkomen verklaren. Verschui-
vingen in de inflatiedoelstelling van de centrale bank en aanbodschokken lijken belangrijker te zijn voor
de verklaring van economische fluctuaties.

Trefwoorden: Bedrijfskredieten, aandelenprijzen, vector error correction modellen, impulse response

functies
JEL Codes: G32
 –1–

1 INTRODUCTION

The recent price increases on stock markets and the ease with which banks supply credit to ‘new econ-
omy’ firms has aroused an interest in the way how possibly erratic events on credit and stock markets can
affect economic fluctuations. The purpose of this paper is to investigate the dynamic reaction of interest
rates, the amount of real corporate credit, real stock prices, inflation and real output to non-fundamental
movements in the markets for stocks and corporate credit within a structural vector autoregressive [VAR]
model. In order to control for fundamental movements in the aforementioned variables we also analyze
the dynamic response to temporal and permanent shocks to monetary policy, and supply side shocks.

What role do stock prices and (corporate) credit play in the macroeconomy? Stock prices can affect
macroeconomic activity through their impact upon the balance sheet of economic agents: substantially
higher stock prices increase the net worth of households and firms, based on which banks are prepared
to supply households and firms with more credit which in turns increases the current expenditures of
housholds and firms. Next to that, higher stock prices decrease the reliance of firms upon banks for
the financing of their investments projects, as these can more easily be financed directly with stocks
themselves. The amount of extended credit itself, of course, limits the current expenditures of economic
actors. The bulk of the existing literature focusses upon the role of credit and stock prices in the trans-
mission mechanism of monetary policy. Especially with regard to credit a large body of research claims
that monetary policy really matters in the generation of business cycles through the way it restricts the
availability of bank credit via the level of bank reserves, see also Gertler (1988).

Existing empirical studies of the macroeconomic role of credit and stock prices are mainly aimed at the
aforementioned transmission role. Bernanke and Blinder (1992), for example, use structural VAR models
for the United States [U.S.] economy in order to show that the ‘money’ channel itself has not enough
power to explain the impact of monetary policy upon the real economy, and they show that monetary
policy also works through the bank credit channel. In Christiano, Eichenbaum, and Evans (1996) a more
thorough empirical analysis of the role of credit in the monetary transmission mechanism in the United
States is executed, mostly from the view of credit demand. More explicitly, Christiano, Eichenbaum,
and Evans (1996) decompose the ‘flow of funds’ to firms in a part related to stock prices and a credit
part, and they subsequently analyze how this credit part reacts to monetary policy changes. Christiano,
Eichenbaum, and Evans (1996) observe that corporate credit at first increases in response to a monetary
contraction after which it decreases for a number periods below its pre-shock level, and they explain this
by the observation that firms only can adjust their expenditures with a lag and that firms use credit as a
 –2–

buffer for the initial decrease in receipts. More recently, de Haan and Sterken (2000) have analyzed the
effects of both the debt structure of firms as well as their governance structure. The results in de Haan
and Sterken (2000) show that for the Euro area public firms (i.e. firms with publicly offered shares) are
less sensitive to monetary policy shocks than private firms (i.e. firms whose shares cannot be publicly
offered). One cause of this distinction in response to monetary policy shocks is the observation that
private firms depend more on corporate credit for the financing of their operations.

As can be infered from the previous discussion, existing empirical studies mainly focus on the role of
credit and stock prices in the transmission of monetary policy. In contrast to this our paper explicitly
takes a look at the macroeconomic role of autonomous (temporary) shifts in credit supply and of fluc-
tuations in stock market sentiment. Motivation of the relevance of such an empirical approach can be
found in Bernanke and Gertler (1989). In this particular article a real business cycle model with informa-
tional asymmetries is introduced and it generates an artificial economy in which the financial structure
is of importance without relying on phenomena as price and wage rigidities. The net worth position of
borrowers is in the above mentioned model a key factor in determining the external funding capacity
of borrowers. Also, redistributions between creditors and debtors influence real economic activity in the
model of Bernanke and Gertler (1989). Hence, a positive stock market sentiment shock improves the bal-
ance sheet of borrowers which they use to borrow (and spend) more. On the other hand a positive credit
supply shock, for example due to an overreaction of banks after an increase of interbank competition
caused by liberalisations, causes a redistribution amongst debtors and creditors in favor of the debtors
who also increase aggregate spending. In our paper we focus on the influence of temporary shocks in
the stock market and corporate credit market on these markets themselves plus inflation and economic
activity. We chose for corporate credit instead of other forms of credit as firms are also issuers of stocks
and therefore the markets for corporate credit and stock markets must be closely related. Our analysis is
conducted for the Netherlands and also, as a benchmark, the U.S.

In the remainder of this paper we impose in Section 2 a number of equilibrium relationships upon our
five variable VAR system comprising of interest rates, real corporate credit, real stock prices, inflation
and real output through the inclusion of cointegration relationships. We also test in this section the
empirical validity of these equilibrium relationships. Five structural shocks are identified for our VAR
model in Section 3 consisting of a monetary policy shock, a credit supply shock, a stock market sentiment
shock, a nominal shock and a supply shock. The influence of these shocks on the dynamics in our five
key variables are analyzed through impulse response functions and forecast error variances. Section 4
concludes this paper.
 –3–

2 THE LONG-RUN STRUCTURE

In this section we describe the long-run structure of our VAR system which includes real corporate credit,
real stock prices, real output, the short-term interest rate and inflation. First, we show in Section 2.1 how
the long-run structure can be imposed upon the VAR model for our five variables through the inclusion
of cointegration relationships. Section 2.2 contains a cointegration analysis which tests our long-run
structure.

2.1 Long-Run Relationships

Real corporate credit, real stock prices, real output, the short-term interest rate and inflation can be
considered as I(1) series.1 Therefore, we follow Johansen (1991) and model the interaction between our
I(1) series through a five-variable vector error correction model [VEC]:
 

µ  αβ Xt  1  ∑ γ
∆X   ε 
p 1
∆Xt
t
j 1
X j t j t (1)

with

X

t it ct pts  ∆pt yt

t is the time index with t
1      T , µ is a 5  1 vector of intercepts and ∆ is the first difference operator
∆z
 1  L  z
z  z  . In (1) we define the following variables:
t t t t 1

– it : the short-term interest rate in period t,

– ct : log real corporate credit in period t,
– pts : log real stock price index in period t,
– ∆pt : rate of inflation in period t,
– yt : log real output in period t.
The long-run interactions between the variables in Xt are regulated by r cointegration relationships, i.e.
we have r stationary linear combinations of the variables in Xt with 0  r 5 and we denote these
r combinations as cointegrating vectors. Due to cointegration we have in VEC model (1) the 5  r
matrix β of r cointegrating vectors, the 5  r matrix α with the adjustment parameters with respect

1 Unreported unit root tests confirm this viewpoint.

 –4–

to these r cointegrating vectors, γX  is a 5  5 parameter matrix for the lagged first differences and
  is a 5 
j

εt  ε 1t ε2t ε3t ε4t ε5t 1 vector of white noise disturbances. Note that the linear time trend is
restricted to be solely present in the long-term relationships.

After testing a number of possible specifications we assume in our empirical analysis the presence of
three long-run relationships for our five variables:

it  β11 ∆pt υ 1t

ct   β t β y  υ 
21 22 t 2t (2)

p   β i  β y  υ 
s
t 31 t 32 t 3t

where the υ’s are stationary deviations and every β parameter is larger than zero. As the short-term
interest rate is in the long-run determined by the central bank the first relationship in (2) can be considered
as a central bank reaction function in which the central bank is in the long-run only concerned with price
stability. The second and third relationships in (2) reflect the phenomenon that an increase in real output
increases the real profitability of companies which results in higher stock prices and facilitates a higher
credit supply as the higher profitability leads to a higher pay-off capacity.

The short-term interest rate, on the other hand, only seems to play a role in the long-run stock price
relationship. This long-run effect of interest rates can be interpreted as the impact of changes in the
discount rate, with which the present value of the expected future real dividends is calculated, upon the
stock price. One would also expect to find a long-run impact of the interest rate on corporate credit, but
our cointegrating vector restrictions tests rejected this possibility for our datasets.

A linear deterministic trend is not included in the equilibrium relationships in (2) for the interest rate and
the stock prices. In the equilibrium relationship for corporate credit, however, the linear deterministic
trend has a negative impact due to structural shifts in the financial policies of firms and as such it acts
as a trend for financial disintermediation.2 Hence, the long-run relationships in (2) imply a cointegration
rank value of r  3 in (1).

2 For example, an improvement in the access of firms to funds on the stock market decreases the dependency of
firms on banks to finance their investment projects. Also, liberalisations makes it possible for firms to borrow
funds from other firms instead of banks. Developments like the aforementioned structurally decreases the demand
for corporate credit.
 –5–

2.2 Cointegration Analysis

As was already mentioned in Section 1 we shall conduct our empirical analysis for two countries, namely
the Netherlands and the U.S. All data are quarterly and the utilized samples for the Netherlands and the
U.S. equal 1977:1-1997:4 and 1972:4-2000:2 respectively. In order to test the long-run relationships
from Section 2.1 we have to find for our countries of interest empirical proxies for the short-term interest
rate (it ), corporate credit (ct ), stock prices (pts ), inflation (∆pt ) and real output (yt ). In all countries it
is proxied through the annualized 3-month money market rate in decimals, ct equals the logarithm of
bankcredit to domestic firms divided by the consumer price index (CPI), pts equals the log of the major
domestic stock price index divided by the CPI, ∆pt is constructed as the first difference of the log of
the CPI multiplied by 4 (in order to get an annualized inflation rate) and yt is the log of gross national
product in real terms.3

For each country we estimate an unrestricted (i.e. r ! 5) VEC consisting of our five variables. The lag
order is selected based on a two-step procedure, where we first select an optimal lag order p in (1) based
on the Akaike information criterion [AIC] computed for p ! 1" # # # " p ! 8. Next, we checked for each
equation of the VEC model at the optimal AIC lag order if there was any significant autocorrelation left in
the residuals, and if this was the case we increased the lag order until this autocorrelation disapeared. The
resulting optimal lag order p in (1) for the Netherlands and the U.S. equals p ! 2 and p ! 3 respectively.
Due to the seasonality in the corporate credit data and the inflation series, we have added for each country
to (1) three demeaned seasonal dummies.

After we have estimated the unrestricted VEC model we applied the sequential cointegration rank test
of Johansen (1991) in order to select the proper cointegration rank value, and the results of these tests
for our two countries can be found in Table 1. From Table 1 one can infer that for the U.S. the optimal
cointegration rank value in (1) is equal to r ! 3 as the nul hypotheses of r ! 0, r ! 1 and r ! 2 can
be rejected versus the alternative of a stationary VAR, whereas the null of r ! 3 cannot be rejected. In
the case of the Netherlands the tests seem to indicate that the optimal cointegration rank value is equal
to r ! 4. However, the presence of four long-run relationships in (1) is economically implausible. We
therefore consider it appropriate to assume in the remainder of the paper that the dynamics in (1) are for
the Netherlands also regulated by 3 cointegration relationships.

3 Dutch corporate credit data were retrieved from the database which corresponds with the MORKMON macroe-
conometric model for the Netherlands as used at the Dutch Central Bank, and these data end in 1997. For the U.S.
the corporate credit data were supplied by the BIS. All the remaining data series came from the IMF’s International
Financial Statistics.
 –6–

Table 1 Cointegration rank testsa

p LR(0 5) $ LR(1 5) $ LR(2 5) $ LR(3 5) $ LR(4 5) $

Netherlands 1 % &&&
112 83 % &&
68 46 42 64 % && % &
24 35 %
9 51

United States 2 % &&&

123 70 % &&&
73 63 40 10 % & %
19 76 %
4 38

Asymptotic quantiles
LR(0 5) $ LR(1 5) $ LR(2 5) $ LR(3 5) $ LR(4 5) $
90% %
82 68 %
58 96 39 08 % %
22 95 %
10 56

95% %
86 96 %
62 61 42 20 % %
25 47 %
12 39

99% %
95 38 %
70 22 48 59 % %
30 65 %
16 39
'
( ) * ) ) + ,) ) ) -
a “LR(r 5)"indicates the Johansen (1991) likelihood ratio test for cointegration rank value r versus a stationary
VAR (r 5) in (1), “p"indicates the lag order used in (1), an indicates rejection of the null hypothesis
at the 90% (95%) [99%] asymptotic quantile from Johansen (1996, Table 15.4).
 –7–

Table 2 Restricted cointegrating vectorsa

it ct pts ∆pt yt t p-value

Netherlands
β1 ./ ( 1 0 0 0 01 60 0 0 )
β2 ./ ( 0 1 0 0 0 71 41 01 04 ) 0.07
β3 ./ ( 18.03 0 1 0 0 31 25 0 )

United States
β1 ./ ( 1 0 0 0 21 21 0 0 )
β2 ./ ( 0 1 0 0 0 51 25 01 04 ) 0.14
β3 ./ ( 0 0 1 0 0 31 31 0 )
a Estimates of β 243 5
β1 β2 β3 in (1) restricted according to (2) and a “1"indi-
cates the dependent variable in these long-run relationships. The p-value of the

35
corrected likelihood ratio test for the appropriateness of the restricted cointe-
grated vectors (see footnote 4) is based on a χ2 4 distribution in the case of
the Netherlands and on a χ2 35
5 in the case of the U.S (see also Johansen and
Juselius (1994)).

We are now able to test the proposed long-run structure from (2) for our estimated cointegrating vectors.
The estimates corresponding to our long-run structure (2) can be found in Table 2, and this table also
includes p-values of likelihood ratio tests for the appropriateness of the long-run relationships. Note that
for the U.S. we have imposed the extra restriction that β31 / 0 in (2), as estimates of β31 indicated that
the interest rate had a positive long-run influence on stock prices which is not in compliance with our
economic priors. In the case of the Netherlands the p-value equals 7% whereas for the U.S. this p-value
is 14%, and we therefore accept in both cases the imposed long-run structure.4 The parameter estimates
from Table 2 are in compliance with (2), and one implication of these parameter estimates is that the
Federal Reserve seems to be more sensitive to domestic inflation developments than the Dutch central
bank as the β11 parameter is larger for the U.S. than for the Netherlands. One explanation can be the
fact that the Netherlands (within the EMS) have had a fixed exchange rate regime in which one had to
smooth the domestic interest rate with respect to foreign interest rates.

4 Asymptotically likelihood ratio tests for simultaneous restrictions upon the cointegrating vectors are distributed

as a χ2 random variable (see Johansen (1996, Chapter 13)). Due to the bad finite sample performance of χ2 tests
under a true null hypothesis we use a finite sample correction for our likelihood ratio test based on the average
number of degrees-of-freedom under the alternative hypothesis instead of the number of observations (see Sims
(1980)) and we reject the null when the p-value of this corrected likelihood ratio test is smaller than 5%.
 –8–

From Table 2 it can also be observed that for both countries real output has a very large long-run impact
upon both corporate credit and stock prices. These phenomena are a bit puzzling as they are difficult
to explain. One possible explanation can be that real output acts in our VAR models as a proxy for a
wealth effect as is the case in the empirical literature on M3-based money demand. Fase and Winder
(1998) show that when one adds a measure of wealth to the M3 money demand function that the income
elasticity decreases below 1. Hence, as corporate credit appears as an asset on the balance sheets of
banks and the components of M3 as a liability the high income elasticities in Table 2 can possibly be
interpreted as a reflection of the impact of wealth developments upon corporate credit. On the other
hand, the high parameter values for real output in Table 2 could also indicate that the long-run impact of
real output upon corporate credit and stock prices has shifted through time, and as we have not allowed
for this kind of instability in the long-run relationships it can cause an artificially high value for these
real income elasticities.
 –9–

3 THE IMPACT OF STRUCTURAL SHOCKS

In the previous section we were solely interested in the long-run interactions between the short-term
interest rate, corporate credit, stock prices, inflation and real output. The purpose of this section is to
analyze the dynamical interactions between these variables. In order to be able to do that, we have to
identify the economic shocks that have influenced the series and this is done in Section 3.1. The results
of the corresponding empirical analysis can be found in Section 3.2.

3.1 Identifying Structural Shocks

The VEC system in (1) of Section 2.1 enables us to isolate the economic effects of monetary policy
actions, credit supply shocks and so on. In order to isolate the effect of these structural shocks, however,
we first have to identify the economic shocks which have influenced the dynamics within (1) such that
they are orthogonal to each other. One way in which economic shocks can be identified is to relate the
white noise disturbance vector εt of VEC model (1) to the 5 6 1 vector of structural shocks et :

εt 7 Cet 8 (3)

where e has an identity covariance matrix. It is common practice to base an estimate of the 5 6 5 matrix
C in (3) on the Cholesky decomposition of the inverted estimated covariance matrix of εt in (1). Such
an approach only allows for contemporaneous restrictions on the series. Next to these contemporaneous
restrictions one can also allow for a subsample of structural shocks to have a permanent influence on
the series within the VEC system and that is what we do in this paper. In this socalled common trends
approach we assume r 7 3 in (1) and it implies that the five stochastic trends each are a function of two
autonomous stochastic trends. Therefore, only two of the five economic shocks in et should have an im-
pact in the long-run. King, Plosser, Stock, and Watson (1991) and Mellander, Vredin, and Warne (1992)
model these permanent shocks through restricting the C matrix such that its parameters are functions of
9
the estimated αβ matrix in (1).

All of the aforementioned approaches imply a certain recursive ordering amongst the economic shocks in
et , as both approaches are in one way or another based on the lower triangular structure of the Cholesky
factorization. Consequently, the number of economically appropriate representations is limited by the
fact that such a representation can only be recursive in nature. An alternative identification framework
 – 10 –

follows Bernanke (1986) and Sims (1988). In this framework one imposes non-recursive zero-restrictions
upon the C matrix in (3) based on economic considerations. Vlaar (1998) extends this framework in
order to decompose the structural shocks in temporary and permanent shocks. The restrictions imposed
by Vlaar (1998) on C are twofold: contemporaneous non-recursive zero-restrictions, and stochastic long-
:
run restrictions in which the parameters of C are related to estimates of the αβ matrix in (1).5 Due to
the fact that the Vlaar (1998) approach is non-recursive in nature and as such allows for a larger number
of possible economic representations, we employ this framework to isolate the effects of a number of
economic shocks.

Conditional upon a cointegration rank value r ; 3 in (1) the five structural shocks in vector et of (3) are
classified in two permanent shocks and three temporary shocks. The two permanent shocks are:
– <
esup t : a supply side shock originating in the real side of the economy;
– <
en t : a nominal shock which permanently shifts the rate of inflation,
whereas the temporary shocks are equal to:
– <
emp t : a monetary policy shock;
– <
ecr t : an autonomous credit supply shock,
– <
es t : a shock in stock market sentiment.
The contemporaneous and long-run restrictions which are used to identify these five economic shocks
are summarized in Table 3.

The supply side shock can be interpreted as a permanent shift in the production technology or shifts
in real wages which permanently affect labour supply or labour demand. Our nominal shock reflects a
change in the inflation objective of the central bank and as such it will induce a permanent change in the
rate of inflation, see also Vlaar and Schuberth (1999). In order to distinguish the supply side shock from
the nominal shock, we have assumed in Table 3, in accordance with the ‘classsical dichotomy’, that the
nominal shock has no long-run impact on real output plus an absence of a long-run impact of the supply
side shock on the rate of inflation. This particular distinction yields an overidentifying restriction and we
can therefore test whether or not the ‘classical dichotomy’ holds within our econometric framework.

Following Bernanke and Blinder (1992) and Gali (1992), we interpret independent innovations in the
short-term interest rate which do not have a contemporaneous effect upon output as shocks to monetary
policy. In general we assume like Gerlach and Smets (1995) that there is no instantaneous pass through
of monetary policy shocks to the real quantities in our system. The ‘price’ variables (i.e. the interest

=
5 Vlaar (1998) also provides a correction for the stochastic nature of the long-run restrictions upon C based on

the partial dervatives of C with respect to the elements of αβ , and this correction can be used to compute the
distribution of the parameters in C.
 – 11 –

Table 3 Identifying restrictionsa

emp t > ecr t> >

es t >
en t esup t >
Contemporaneous restrictions
it
ct 0 0
pts
∆pt
yt 0

Long-run restrictions
it 0 0 0
ct 0 0 0
pts 0 0 0
∆pt 0 0 0 0
yt 0 0 0 0
a
? ? ? ? ?
The structural shocks emp t , ecr t , es t , en t and esup t are a
monetary policy shock, a credit supply shock, a stock price
shock, a nominal shock and a supply shock respectively. A
zero (0) indicates the absence of a contemporaneous or long-
run impact of a structural shock on a variable.

rate, stock prices and CPI inflation), on the other hand, are allowed to react instantaneously to changes in
monetary policy due to exchange rate changes which affect import prices or higher capital costs caused
by higher market interest rates.6 As a consequence, we also abstract in the upper part of Table 3 from a
contemporaneous impact of monetary policy shocks on real corporate credit. Note that monetary policy
shocks reflect the measures that a central bank has to take in order to keep the inflation in line with
its inflation objective, and as a consequence we do not allow for a significant long-run impact of the
monetary policy shock in the lower part of Table 3.

A credit supply shock can occur, for example, when after liberalisation measures competition amongst
financial institutions increases such that these institutions are prepared to supply credit to firms on extra
favorable terms in order to attract a larger body of client firms. As financial institutions only can deviate

6
Such a distinction between ‘quantity’ and ‘price’ effects also avoids in this case the occurence of the so-called
‘price puzzle’ (see Sims (1992)): inflation significantly increases in response to a monetary policy contraction.
 – 12 –

temporarely from a ‘sound’ credit supply policy, we have assumed in the lower part of Table 3 that such
a credit supply shock only has a temporary effect.

Finally, stock price shocks reflect fluctuations in market sentiment which are unrelated to developments
in the underlying economic fundamentals. Therefore, these stock price shocks are also assumed to have
only a temporary effect upon all the variables in the system (see the lower part of Table 3). Next to that,
we have assumed in the upper part of Table 3 that there is no contemporaneous influence of the stock
price shock on corporate credit as financial institutions need time to assess whether they feel if it is a
sound operation to extend more credit to firms based on the higher market valuations of these firms.7

3.2 The Empirical Interactions

In this subsection we use for the Netherlands and the U.S. an estimate of VEC model (1) with r @ 3,
the restricted cointegrating vectors from Table 2 and the structural restrictions from Table 3 imposed on
it (plus a lag order p equal to 2 and 3 respetively). The estimated VEC models are used to compute
the impulse response functions and the forecast error variance decompositions of our economic shocks
for the short-run interest rate, corporate credit, stock prices, inflation and output. The impulse response
functions are responses in each of our five variables to a standard deviation structural shock and these
responses are plotted in Figures 1 and 3 with the corresponding 95% confidence bands (the dashed lines)
computed through the methods in Vlaar (1998). The forecast error variance decompositions for our five
A A A A A
structural shocks emp t , ecr t , es t , en t and esup t , and the corresponding 95% confidence intervals can be
found in Figures 2 and 4.

A
When we look at the effect of monetary policy shocks (emp t ) in the first column of Figures 1 and 3, we
A
observe for both countries that a positive emp t results in a persistence decline of both output and stock
prices. The effect on stock prices and Dutch output, though, does not seem to be signifcant in contrast to
the effect on U.S. output. Dutch inflation significantly decreases due to a monetary contraction whereas
U.S. inflation seems not to react to such an event. Corporate credit seems at first to increase in the
Netherlands in response to a monetary contraction (but not signficantly so), after which the amount of
credit falls back to its pre-shock level. This result can be based on the observation that firms are only
able to adjust their expenditures with a lag. Hence, due to a fall in receipts and a fall in stock prices, both

7
BC
All these identifying restrictions yields an overidentified system for each of our countries. This overidentification,
and therefore also the ‘classical dichotomy’, is accepted for both countries as the χ2 1 p-value of the likelihood
ratio statistic which tests this overidentification equals 6% for the Netherlands and 41% for the U.S.
 – 13 –

caused by the monetary contraction, firms are forced to borrow more in order to finance their expendi-
tures. In contrast U.S. corporate credit falls below its pre-shock level (again not significantly so) and it
only seems to return to this level after a number of years. One can think of several possible explanations
for this effect. For example, it can be the case that Dutch banks rely more on the price of their credit
supply in order to deter less credit worthy firms whereas American banks more actively vary the real
amount of corporate credit. Also, it can such that American firms have more financing possibilities apart
from corporate credit and the stock market than Dutch firms. From the first columns in Figures 2 and 4 it
becomes clear that temporary monetary policy shocks explain only a small proportion of the fluctuations
in our series, with the exception of stock prices and inflation in the case of the Netherlands, and the
interest rate and stock prices in the case of the U.S.

Positive credit supply shocks significantly increase the interest rate and the real amount of corporate
credit (see the second columns in Figures 1 and 3) for both countries, and both series are significantly
above their pre-shock levels during the first two years after the occurence of the shock. There seems to be
D
no significant effect of ecr t upon the other series with the sole exception of U.S. inflation which exhibits
a one time increase due to a positive credit supply shock.

Both Dutch inflation, albeit not significantly so, and U.S. inflation are pushed below their pre-shock
D
levels in Figures 1 and 3 as a reaction to a positive stock market sentiment shock es t . In the case of the
U.S. such a stock market sentiment shock could occur on a global scale as the U.S. stock market can
act as an attractor of international capital flows. The resulting appreciation of U.S. dollar exchange rates
will decrease import prices and as such lowers U.S. inflation. Only in the case of the Netherlands such
D
a es t shock has real economic consequences, as output increases above its equilibrium level during the
first two to three years after the shock.

D
As can be seen from the last two columns of Figures 1 and 3, both the nominal shock en t as well as
D
the supply shock esup t have their expected effects upon the series in our VEC systems. Changes in the
inflation objective of the central bank permanently increases inflation and the interest rate, and in the case
of the Netherlands it also permanently decreases stock prices through the interest rate channel. The real
amount of corporate credit is not affected by the nominal shock whereas real output temporarily increases
due to this type of shock. Supply shocks result for both countries in the long-run in higher levels of real
output, corporate credit and stock prices, which is in line with our long-run restrictions. The Dutch
interest rate and U.S. inflation are temporarily decreased as a consequence of the supply shock.

All in all, the impulse responses in Figures 1 and 3 indicate that spillover effects from erratic shocks in
the credit and stock markets to variables such as inflation and output can occur in both the Netherlands
 – 14 –

and the U.S. However, if we look at the corresponding forecast error variance decompositions in the
second and third columns of Figures 2 and 4 one can observe that only small proportion of the variability
in inflation and output is related to shocks in credit supply and stock market sentiment. Of much more
importance for economic fluctuations are the occurence of nominal shocks and supply shocks, as can be
observed form the last two columns of Figures 2 and 4.
 – 15 –

4 CONCLUSIONS

The existing literature on the macroeconomic role of the credit and stock markets focusses almost entirely
on the share of these markets in the transmission of changes in monetary policy. From the viewpoint of
financial stability, however, non-fundamental developments in the credit and stock markets are also of
importance, especially if these developments would lead to a vulnerable financial sector. In turn the
aforementioned developments in the supply of credit or stock prices could potentially affect the course
of the business cycle. In this paper we therefore have analyzed for the Netherlands and the U.S. the
macroeconomic impact of these non-fundamental movements in corporate credit supply and stock prices
on interest rates, inflation, economic activity and the markets for corporate credit and stocks. To distin-
guish the effects of the aforementioned two shocks from fundamental movements in our macroeconomic
series, we also analyzed the empirical impact of monetary policy shocks, changes in the inflation objec-
tive of the central bank and supply shocks.

In Section 2 we postulate that in the long-run the dynamic interactions between the short-run interest rate,
corporate credit, stock prices, inflation and real output are regulated by three equilibrium relationships:
a positive relationship between the interest rate and inflation, one relationship in which corporate credit
positively depends upon output and negatively depends on a linear deterministic time trend and finally
a relationship in which stock prices are positively determined by output and in which they negatively
affected by the interest rates. These three equilibrium relationships result from extensive tests of several
plausible restrictions on the cointegrating vectors and they are not necessarily the economic most plau-
sible ones. The used multivariate cointegration testing techniques show that the above mentioned three
long-run relationships give the best empirical representation of the long-run interaction between the
short-run interest rate, corporate credit, stock prices, inflation and real output for the Netherlands and the
U.S., although for the U.S. our analysis indicated that the interest rate did not have a long-run influence
upon stock prices. In future research one should deal with some of our results which are less plausible
from an economic point of view, i.e. a non-stationary real interest rate, no long-run interest rate effect
on corporate credit and very large long-run effects of real output on corporate credit and stock prices.
One cause of these less plausible results is the possibility of instable equilibrium relationships, and as a
consequence of that one could repeat the cointegration analysis of this paper based on a framework with
structural breaks.

We identify within our cointegrated VAR model for the five aforementioned series five structural shocks:
monetary policy shock, an erratic credit supply shock, a stock market sentiment shock, an inflation ob-
 – 16 –

jective shock and a supply side shock. The identification is done within a non-recursive framework and it
takes into account both the contemporaneous impact of the shocks upon the series as well as the long-run
impact. The estimated impulse response functions for the Netherlands and the U.S. indicated that credit
supply shocks triggered a contraction in monetary policy wich has only a minor effect upong economic
activity. In the U.S. such a credit supply shock had a temporary, positive effect on inflation, whereas
in the Netherlands there seemed to be no influence of a credit supply shock on economic fluctuations.
Stock market sentiment shocks, on the other hand, potentially had a positive effect on real output and in
the U.S. this type of shock results in a temporary decrease in the inflation rate.

Note that some of our impulse response results are a bit puzzling from an economic prespective. One
example of such a puzzling result is the above mentioned positive effect of an erratic credit supply
shock on inflation. This phenomenon could be the result of a lack of empirical information on inflation
expectations and the like. One way of remedying this lack of information is to expand in future research
the set variables in the VAR model with series that can bridge this gap in the information set, such as
commodity prices.

However, if we contrast the results of our estimated impulse response functions with those of the esti-
mated forecast error variance decompositions, one can conclude that the proportion of the variability in
inflation and output explained by credit supply shocks and stock market sentiment shocks is both for the
Netherlands and the U.S. small. In compliance with our long-run restrictions, both shifts in the inflation
objective as well as the supply side shock seemed to be able to explain the bulk of the variations in
inflation and economic activity for both the Netherlands and the U.S.

In theoretical models like those of Bernanke and Gertler (1989) erratic shocks in the credit and stock
markets could potentially have a large impact on economic fluctuations, through shifts in the balance
sheets of borrowers and redistributions amongst creditors and debtors, our empirical analysis for the
Netherlands and the U.S. indicated otherwise. Despite some flaws in our analysis, it seems to indicate
that any impact of fluctuations in the amount of credit and stock prices on the macroeconomy in these two
countries is due to the transmission of fundamental shocks such as temporary monetary policy changes,
inflation objective shifts and supply side developments, and less due to autonomous instabilities in the
financial sector.
 – 17 –

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Holland, volume 25 of Carnegie-Rochester Conference Series on Public Policy, pp. 49–100.

Bernanke, B. and M. Gertler, 1989, Agency Costs, Net Worth, and Business Fluctuations, American
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Christiano, L.J., M. Eichenbaum, and C. Evans, 1996, The Effects of Monetary Policy Shocks: Evi-
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Gertler, M., 1988, Financial Structure and Aggregate Economic Activity: An Overview, Journal of
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Autoregressive Models, Econometrica, 59, 1551–1580.

Johansen, S., 1996, Likelihood-Based Inference in Cointegrated Vector Autoregressive Models, Oxford:
Oxford University Press, 2nd edition.
 – 18 –

King, R.G., C.I. Plosser, J.H. Stock, and M.W. Watson, 1991, Stochastic Trends and Economic Fluc-
tuations, American Economic Review, 81, 819–840.

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terdependent Economies, Brookings Institute, pp. 305–321.

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Vlaar, P.J.G. and H. Schuberth, 1999, Monetary Transmission and Controllability of Money in Eu-
rope: A Structural Vector Error Correction Approach, DNB Staff Reports 36, De Nederlandsche Bank,
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Vlaar, P.J.G., 1998, On the Asymptotic Distribution of Impulse Response Functions with Long Run
Restrictions, DNB Staff Reports 22, De Nederlandsche Bank, http://www.dnb.nl.
 Impulse response functions
RESP. OF INTEREST TO e_mp shock RESP. OF INTEREST TO e_cr shock RESP. OF INTEREST TO e_s shock RESP. OF INTEREST TO e_n shock RESP. OF INTEREST TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.006 0.010 0.0032 0.0112 0.0016
GFEJEFGHJE IE J EIFKG

EGJFHEGJG
0.005 0.0096 0.0000
0.008 0.0016
0.004
0.0080 -0.0016
0.003 0.006 -0.0000
0.0064 -0.0032
0.002
0.004 -0.0016 0.0048 -0.0048
0.001
0.0032 -0.0064
0.000 0.002 -0.0032
0.0016 -0.0080
-0.001
0.000 -0.0048
-0.002 0.0000 -0.0096
-0.003 -0.002 -0.0064 -0.0016 -0.0112
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GH
E
G
E
EF
GHJ
FG
J
EF
GH
E
GH

EF
GHJ
F
HE
EF
GH
E
GJ
RESP. OF CREDIT TO e_mp shock RESP. OF CREDIT TO e_cr shock RESP. OF CREDIT TO e_s shock RESP. OF CREDIT TO e_n shock RESP. OF CREDIT TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.012 0.035 0.0050 0.010 0.05

K J K J K J
0.010 0.030
0.0025
0.04
0.005
0.008
0.025
0.0000
0.006 0.03
0.020
0.000
0.004 -0.0025
0.015 0.02
0.002 -0.0050
-0.005
0.010
0.000 0.01
-0.0075
0.005
-0.002
-0.010
0.00
0.000 -0.0100
-0.004
-0.006 -0.005 -0.0125 -0.015 -0.01
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
RESP. OF STOCKS TO e_mp shock RESP. OF STOCKS TO e_cr shock RESP. OF STOCKS TO e_s shock RESP. OF STOCKS TO e_n shock RESP. OF STOCKS TO e_sup shock
L

Q
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.02 0.027 0.07 0.02 0.048

J EIFKGO

Figure 1 Impulse response functions for the Netherlands.

0.01 0.06
0.018 0.00
0.032
0.00
0.05
0.009 -0.02
-0.01
– 19 –

0.04
0.016
-0.02 0.000 -0.04
0.03
-0.03 -0.009 -0.06
0.000
0.02
-0.04
-0.018 -0.08
0.01
-0.05
-0.016
-0.027 0.00 -0.10
-0.06
-0.07 -0.036 -0.01 -0.12 -0.032
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
RESP. OF INFLATION TO e_mp shock RESP. OF INFLATION TO e_cr shock RESP. OF INFLATION TO e_s shock RESP. OF INFLATION TO e_n shock RESP. OF INFLATION TO e_sup shock
M

M
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.0050 0.004 0.0080 0.012 0.006

E J E F G H J J E F G H J E
0.0025
0.0040 0.010 0.004
0.002
0.0000
-0.0025 0.0000 0.008 0.002
0.000
-0.0050
-0.0040 0.006 0.000
-0.0075
-0.002
-0.0100 -0.0080 0.004 -0.002
-0.0125
-0.004
-0.0120 0.002 -0.004
-0.0150
-0.0175 -0.006 -0.0160 0.000 -0.006
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GHJ
F
HE
EF
GHJ
FG
J
EF
GH
E
GH

EF
GHJ
FG
E
EF
GHJ
FG
J
RESP. OF OUTPUT TO e_mp shock RESP. OF OUTPUT TO e_cr shock RESP. OF OUTPUT TO e_s shock RESP. OF OUTPUT TO e_n shock RESP. OF OUTPUT TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.002 0.004 0.0056 0.010 0.0075
F I E J E

K J K J K
0.003 0.0048
0.001 0.008
0.0040 0.0050
0.002
0.000 0.006
0.0032
0.001
-0.001 0.0024 0.004 0.0025
0.000
0.0016
-0.002 0.002
-0.001
0.0008 0.0000
-0.003 0.000
-0.002
0.0000
-0.004 -0.003 -0.0008 -0.002 -0.0025
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20

EF
GH
E
G
E
EF
GHJ
FG
J
EF
GH
E
GH

EF
GH
E
GH
E
EF
GH
E
GJ
 Forecast error variance decompositions
FEV OF INTEREST DUE TO e_mp shock FEV OF INTEREST DUE TO e_cr shock FEV OF INTEREST DUE TO e_s shock FEV OF INTEREST DUE TO e_n shock FEV OF INTEREST DUE TO e_sup shock
R

R
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
J K J K J J K J K J J K J K J J K J K J J K J K J

0.75 0.75 0.75 0.75 0.75

0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
FEV OF CREDIT DUE TO e_mp shock FEV OF CREDIT DUE TO e_cr shock FEV OF CREDIT DUE TO e_s shock FEV OF CREDIT DUE TO e_n shock FEV OF CREDIT DUE TO e_sup shock
S

S
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
0.50 0.50 0.50 0.50 0.50

Forecast error variance decompositions for the Netherlands.

0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GHJ
E
J
EF
GH
HJ
EF
GH
FG
E
EF
GHJ
E
J
EF
GH
HJ
FEV OF STOCKS DUE TO e_mp shock FEV OF STOCKS DUE TO e_cr shock FEV OF STOCKS DUE TO e_s shock FEV OF STOCKS DUE TO e_n shock FEV OF STOCKS DUE TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
– 20 –

0.50 0.50 0.50 0.50 0.50

0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GHJ
E
J
EF
GH
HJ
EF
GH
FG
E
EF
GHJ
E
J
EF
GH
HJ
FEV OF INFLATION DUE TO e_mp shock FEV OF INFLATION DUE TO e_cr shock FEV OF INFLATION DUE TO e_s shock FEV OF INFLATION DUE TO e_n shock FEV OF INFLATION DUE TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
FEV OF OUTPUT DUE TO e_mp shock FEV OF OUTPUT DUE TO e_cr shock FEV OF OUTPUT DUE TO e_s shock FEV OF OUTPUT DUE TO e_n shock FEV OF OUTPUT DUE TO e_sup shock

S
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00

Figure 2
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
 Impulse response functions
RESP. OF INTEREST TO e_mp shock RESP. OF INTEREST TO e_cr shock RESP. OF INTEREST TO e_s shock RESP. OF INTEREST TO e_n shock RESP. OF INTEREST TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.010 0.008 0.0100 0.025 0.0075
E J E FG H J

JKJKJKJK K J K JK J K

J K J K J K
0.0075
0.008 0.006 0.020
0.0050
0.0050
0.006 0.004 0.015
0.0025
0.0025
0.004 0.002 0.0000 0.010
0.0000
-0.0025
0.002 0.000 0.005
-0.0050
-0.0025
0.000 -0.002 0.000
-0.0075
-0.002 -0.004 -0.0100 -0.005 -0.0050
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GH
E
G
E
EF
GHJ
FG
J
EF
GH
E
GH

EF
GH
E
GH
E
EF
GH
E
GJ
RESP. OF CREDIT TO e_mp shock RESP. OF CREDIT TO e_cr shock RESP. OF CREDIT TO e_s shock RESP. OF CREDIT TO e_n shock RESP. OF CREDIT TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.0050 0.015 0.0125 0.025 0.050
0.0025 0.0100 0.045
0.020
0.010
0.040
0.0000 0.0075
0.015
0.035
-0.0025 0.0050
0.005
0.010 0.030
-0.0050 0.0025
0.005 0.025
0.000
-0.0075 0.0000
0.020
0.000
-0.0100 -0.0025
0.015
-0.005
-0.0125 -0.0050 -0.005
0.010
-0.0150 -0.010 -0.0075 -0.010 0.005
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
RESP. OF STOCKS TO e_mp shock RESP. OF STOCKS TO e_cr shock RESP. OF STOCKS TO e_s shock RESP. OF STOCKS TO e_n shock RESP. OF STOCKS TO e_sup shock
L

Q
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%

Figure 3 Impulse response functions for the United States.

0.030 0.05 0.084 0.06 0.04
K J K J K J K J J J J J

0.04 0.072 0.05

0.02
0.03 0.060 0.04
0.000
0.02 0.048 0.03
– 21 –

0.00
0.01 0.036 0.02
-0.030
0.00 0.024 0.01
-0.02
-0.01 0.012 0.00
-0.060
-0.02 0.000 -0.01
-0.04
-0.03 -0.012 -0.02
-0.090 -0.04 -0.024 -0.03 -0.06
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
RESP. OF INFLATION TO e_mp shock RESP. OF INFLATION TO e_cr shock RESP. OF INFLATION TO e_s shock RESP. OF INFLATION TO e_n shock RESP. OF INFLATION TO e_sup shock
M

M
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.015 0.014 0.0050 0.016 0.0036

JEFGHJEFG

J K J K J K J GHJEFGHJHG
0.012 0.0025 0.014 0.0018
0.010
0.010 0.0000
0.0000 0.012
0.005 0.008 -0.0018
-0.0025 0.010
0.006 -0.0036
0.000 -0.0050 0.008
0.004 -0.0054
-0.0075 0.006
-0.005 0.002 -0.0072
-0.0100 0.004
0.000 -0.0090
-0.010
-0.002 -0.0125 0.002 -0.0108
-0.015 -0.004 -0.0150 0.000 -0.0126
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GH
E
G
E
EF
GHJ
FG
J
EF
GH
E
GH

EF
GHJ
FG
E
EF
GH
E
GJ
RESP. OF OUTPUT TO e_mp shock RESP. OF OUTPUT TO e_cr shock RESP. OF OUTPUT TO e_s shock RESP. OF OUTPUT TO e_n shock RESP. OF OUTPUT TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
0.001 0.003 0.0042 0.0175 0.0100
0.002 0.0150
0.000 0.0028
0.0075
GKFIE J
0.001
0.0125
-0.001 0.0014
0.000 0.0050
0.0100
-0.002 -0.001 0.0000
0.0075 0.0025
-0.003 -0.002 -0.0014
0.0050
-0.003 0.0000
-0.004 -0.0028
0.0025
-0.004
-0.0025
-0.005 -0.0042
-0.005 0.0000
-0.006 -0.006 -0.0056 -0.0025 -0.0050
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20

EF
GH
E
G
E
EF
GHJ
FG
J
EF
GH
E
GH

EF
GHJ
F
HE
EF
GH
E
GJ
 Forecast error variance decompositions
FEV OF INTEREST DUE TO e_mp shock FEV OF INTEREST DUE TO e_cr shock FEV OF INTEREST DUE TO e_s shock FEV OF INTEREST DUE TO e_n shock FEV OF INTEREST DUE TO e_sup shock
R

R
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
J K J K J J K J K J J K J K J J K J K J J K J K J

0.75 0.75 0.75 0.75 0.75

0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
FEV OF CREDIT DUE TO e_mp shock FEV OF CREDIT DUE TO e_cr shock FEV OF CREDIT DUE TO e_s shock FEV OF CREDIT DUE TO e_n shock FEV OF CREDIT DUE TO e_sup shock
S

S
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75

Forecast error variance decompositions for the United States.

0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GHJ
E
J
EF
GH
HJ
EF
GH
FG
E
EF
GHJ
E
J
EF
GH
HJ
FEV OF STOCKS DUE TO e_mp shock FEV OF STOCKS DUE TO e_cr shock FEV OF STOCKS DUE TO e_s shock FEV OF STOCKS DUE TO e_n shock FEV OF STOCKS DUE TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
– 22 –

0.50 0.50 0.50 0.50 0.50

0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
EF
GHJ
E
J
EF
GH
HJ
EF
GH
FG
E
EF
GHJ
E
J
EF
GH
HJ
FEV OF INFLATION DUE TO e_mp shock FEV OF INFLATION DUE TO e_cr shock FEV OF INFLATION DUE TO e_s shock FEV OF INFLATION DUE TO e_n shock FEV OF INFLATION DUE TO e_sup shock
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20
FEV OF OUTPUT DUE TO e_mp shock FEV OF OUTPUT DUE TO e_cr shock FEV OF OUTPUT DUE TO e_s shock FEV OF OUTPUT DUE TO e_n shock FEV OF OUTPUT DUE TO e_sup shock

S
SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5% SIZE= 5%
1.00 1.00 1.00 1.00 1.00
0.75 0.75 0.75 0.75 0.75
0.50 0.50 0.50 0.50 0.50
0.25 0.25 0.25 0.25 0.25
0.00 0.00 0.00 0.00 0.00

Figure 4
2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20 2 4 6 8 10 12 14 16 18 20