To read this content please select one of the options below:

Uncertainty shocks and policymakers’ behavior: evidence from the subprime crisis era

Michael Donadelli (Research Center SAFE, Goethe University Frankfurt, Germany)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 14 September 2015

387

Abstract

Purpose

The purpose of this paper is to examine the effects of the 2007-2009 uncertainty shocks on policymakers’ behavior.

Design/methodology/approach

Uncertainty shocks in the US credit, financial and production markets are represented by extraordinary events. As in Bloom (2009), these events are associated with significant economic and political shocks (e.g. Lehman Brothers’ collapse). Credit markets uncertainty shocks, which played a crucial role in the aftermath of the house prices collapse in the USA, are first analyzed in a bivariate VAR context, and then, embodied in a simple theoretical framework.

Findings

The empirical evidence suggests that the US credit, financial and production markets have been affected by a relative large number of uncertainty shocks (i.e. rare events). In a Brainard’s (1967) uncertainty scenario, it is shown that a bizarre money-liquidity relationship exacerbates the “policymakers’ cautiousness-aggressiveness trade-off.” In addition, the model suggests that a “double” dose of policy, in presence of a global credit crunch, might be useless.

Originality/value

This paper improves the existing literature in two main directions. First, it provides novel empirical evidence on the unusual dynamics of the US credit market and its effects on the real economic activity during the crisis. Second, in a very simple theoretical framework accounting for parameter uncertainty, it addresses whether a bizarre money-credit relationship affects policymakers’ behavior (i.e. cautiousness vs aggressiveness).

Keywords

Acknowledgements

JEL Classification — E01, E41, E44, E52, E58, E61, G01, G15

The author is grateful to the editor and two anonymous referees for their useful comments and support.

Citation

Donadelli, M. (2015), "Uncertainty shocks and policymakers’ behavior: evidence from the subprime crisis era", Journal of Economic Studies, Vol. 42 No. 4, pp. 578-607. https://doi.org/10.1108/JES-01-2014-0016

Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

Related articles