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Understanding the Turbulence in Financial Markets

14th October 2015
by Juan Antolin-Diaz, Juan F. Rubio-Ramrez

Can modern macroeconometrics help?

 Yes. In a context of high uncertainty about the outlook for the global economy and monetary policy, we illustrate how the tools of modern applied macroeconomics can be successfully used to gain valuable insights about the joint behaviour of the macroeconomy and financial markets, which can inform policy and investment decisions. We apply two state-of-the-art econometric models to data on Chinese economic activity and US asset prices, and interpret recent developments in light of these methods. We conclude that the interaction of uncertainty about Chinese economic activity and the perception that the Federal Reserve will increase interest rates independently of economic conditions are likely to be behind the recent increase in volatility.

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