Real Effects of Financial Signals and Surprises

27/01/2010 |  Sorezcky Avihay
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The Global Economy
The recent financial crisis in the US economy drew considerable interest in understanding the interaction between the financial and the real sectors. In this paper I develop a model with financial effects on business cycle fluctuations, based on Real Business Cycle and Financial Accelerator frameworks. In the model I distinguish between financial signals and surprises, i.e., between financial expectations and unexpected realizations. This allows me to decompose the real effects of those shocks. By estimating the model, using Bayesian methods on US data, I find that financial shocks have an important role in business cycle fluctuations. I also find that financial signals and financial surprises have similar effects on the real sector.
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