Report
The direction of the causality between financial shocks and real economy shocks
The size of finance in the global economy has grown sharply in the last 30 years. We can intuitively think that when the size of finance was small, the causality went from real economy shocks to financial shocks; and that since the size of finance has become very substantial, the causality on the contrary goes from financial shocks (correction of excessive debt and asset price bubbles) to real economy shocks. Our exp ectat ion is therefore that in the past, financial crises were triggered by recessions; and that nowadays, recessions are triggered by financial crises. When we analyse empirically the cau sality between financial shocks and real shocks, in OECD countries and for the world as a whole, we see that the expected development to a large extent is similar to the one observed. In the period 1980-95, it was primarily real shocks that caused financial shocks; in the period 1996-2018, all financial shocks caused real shocks.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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