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  • David Ubilava (a1)


The recent global financial crisis and the subsequent recession have revitalized the discussion on causal interactions between financial and economic sectors. In this study, I apply the financial stress and the national activity indices–respectively developed by Federal Reserve Banks of Kansas City and Chicago–to investigate the impact of financial uncertainty on an overall economic performance. I examine nonlinear dynamics in a vector smooth transition autoregressive framework, and illustrate regime-dependent asymmetries in the financial and economic indices using the generalized impulse-response functions. The results reveal more amplified dynamics during the stressed conditions. I further evaluate benefits of nonlinear modeling in an out-of-sample setting. The forecasting exercise brings out the important advantages that nonlinear modeling provides in the identification of the causal effect of financial instability on overall economic performance.


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Address correspondence to: David Ubilava, School of Economics, The University of Sydney, Merewether Building, NSW 2006, Australia; e-mail:


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This paper greatly benefited from many useful comments and suggestions from Edward Nelson, as well as those of two anonymous referees.



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  • David Ubilava (a1)


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