The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation

Tomáš Adam, Miroslav Plašil

This paper investigates empirically to what extent financial variables can explain macroeconomic developments in the Czech Republic and how the results are sensitive to some (usually reasonable or routinely made) modeling choices. To this end, the dynamic model averaging/selection framework is applied to a universe of (potentially large) time-varying parameter VAR models, which allows one to assess the explanatory power of financial variables at each point in time. Based on a set of 27 competing models and an extensive ensemble of alternative specifications of those models, we find that financial variables were particularly relevant in explaining developments in the lead-up to and during economic downturns. By contrast, in tranquil times, models containing only traditional macroeconomic variables explained macroeconomic dynamics reasonably well. Within the broad set of financial variables considered, credit to the private sector, bank profitability, and leverage seem to be among the most relevant indicators.

JEL codes: C32, C53, E44

Keywords: Dynamic model averaging, macro-financial linkages, vector autoregression

Issued: December 2014

Download: CNB WP 11/2014 (pdf, 822 kB)