IDENTIFICATION OF FINANCIAL FACTORS IN ECONOMIC FLUCTUATIONS

We estimate demand, supply, monetary, investment and financial shocks in a VAR identified with a minimum set of sign restrictions on US data. We find that financial shocks are major drivers of fluctuations in output, stock prices and investment but have a limited effect on inflation. In a second step, we disentangle shocks originating in the housing sector, shocks originating in credit markets and uncertainty shocks. In the extended set-up, financial shocks are even more important and a leading role is played by housing shocks that have large and persistent effects on output.