Real sector & banking system: real & feedback effects : a non-linear VAR approach

This paper assesses the relationship between the macroeconomic system and the banking sector by estimating two separate non-linear Vector Autoregressive models (VAR) for the US and Switzerland. The model specification includes the output gap, the interest rate, the in ation rate and a banking quality measure. Impulse response functions are estimated by using the local projections approach. The results highlight the existence of the real effect (going from the macroeconomic system to the banking sector), and of the feedback effect (going from the the banking sector to macroeconomic system). The findings are robust to the sample period, the size of the shocks as well as to the Cholesky decomposition employed.