Financial Conditions for the US: Aggregate Supply or Aggregate Demand Shocks?
It depends. We reply to this question by providing novel empirical evidence about the US economy. We identify the impact of financial high-frequency shocks on macroeconomic variables by estimating mixed- and common frequency VARs. The results from the mixed-frequency VAR show that economic output and inflation move in opposite directions in response to detrimental financial conditions, mimicking negative aggregate supply shocks. Oppositely, the results from the common-frequency VAR show that worsening financial conditions lead to a drop in output and inflation (and in the monetary policy rate), resembling negative aggregate demand shocks.
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