Title: An application of a Bayesian VAR copula model to the effect of macroeconomic risk appetite on the GDP growth
Authors: Fuyu Yang - University of East Anglia (United Kingdom) [presenting]
Roberto Leon-Gonzalez - GRIPS (Japan)
Abstract: GDP growth and monetary policy are closely intertwined with the size of bank balance sheets. Evidence suggests that bank balance sheets grow during booms, and shrink during recessions. We propose a flexible VAR copula model to evaluate a nonlinear association amongst the looseness of bank balance sheet constraints, GDP growth, and macroeconomic risk premium variables. Compared with the conventional VAR model, the relaxation of the distributional assumption in the error term is more realistic in terms of model fitting, which allows for an asymmetric association amongst the key variables in economic downturns. To serve the purpose of model comparisons, we evaluate the impulse response function and log likelihood using both the VAR copula and the VAR models.