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Financial Distress and the Transmission of Macroeconomic Uncertainty: International Evidence

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Reference

Gächter, M., Geiger, M., & Stöckl, S. (2019). Financial Distress and the Transmission of Macroeconomic Uncertainty: International Evidence. Paper presented at the 23nd International Conference on Macroeconomic Analysis and International Finance, Rethymno, Greece.

Publication type

Presentation at Conference

Abstract

We examine the effect of global macroeconomic uncertainty on economic activity, with the magnitude of the impact depending on the current state of the banking sector. Previous literature suggests that financial and uncertainty shocks are important drivers of economic activity, but the distinction between the two is empirically challenging. In this paper, we introduce a new, but surprisingly simple measure of macroeconomic uncertainty that explicitly focuses on the fragility of global macroeconomic developments. While macroeconomic uncertainty generally does have an adverse impact on economic growth in a sample of advanced economies, the magnitude of the effect strongly depends on the current state of its banking sector, i.e. a shock to uncertainty is strongly reinforced when financial intermediation is distressed. Our findings have important implications for policy-makers, as shocks to uncertainty are approximately three times more harmful in a crisis environment.

Persons

Organizational Units

  • Chair in Finance