Series: Working Papers. 2018.
Author: Eddie Gerba and Danilo Leiva-Leon.
Full document
Abstract
We measure the time-varying strength of macro-financial linkages within and across the
US and euro area economies by employing a large set of information for each region. In
doing so, we rely on factor models with drifting parameters where real and financial cycles
are extracted, and shocks are identified via sign and exclusion restrictions. The main
results show that the euro area is disproportionately more sensitive to shocks in the US
macroeconomy and financial sector, resulting in an asymmetric cross-border spillover
pattern between the two economies. Moreover, while macro-financial interactions have
steadily increased in the euro area since the late 1980s, they have oscillated in the US,
exhibiting very long cycles of macro-financial interdependence.