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Private sector balance, financial markets, and US cycle: a SVAR analysis

Paolo Casadio (Risk Management, Intesa Sanpaolo Bank, Rome, Italy)
Antonio Paradiso (Department of Economics, University of Rome La Sapienza, Rome, Italy)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 26 October 2012




Considering the sectoral balance approach of Godley, and focusing only on the two main components of the private sector balance for the US economy (household and non‐financial corporate balance), the purpose of this paper is to investigate the relationship between these two sectors, the financial variables, and economic cycle. In particular, the paper considers all these relationships endogenously.


The authors estimate a structural VAR model between household and (non‐financial) corporate financial balances, financial markets, and economic cycle and the authors perform an impulse response analysis. All the variables are expressed as cyclical components applying the Hodrick‐Prescott filter.


The main result is that: household and corporate balances react to financial markets in the way the authors expected and discussed; the economic cycle influences the two financial balances; the corporate balance has a positive impact on the cycle; the economic cycle and financial balances influence the financial variables. In particular, the point that shows that the corporate balance has a positive impact on the cycle shows that the corporate balance is a leading component of the cycle as suggested by Casadio and Paradiso and accords with Minsky's theory of financial instability.

Research limitations/implications

The analysis does not include the foreign sector (current‐account balance).


This study is an important step forward with respect to the two main contributions in literature which use this approach: the Levy Institute macroeconomic team and Goldman Sachs. Methodologically their models are based on assumptions (such as exogeneity or market clearing price mechanism for the financial markets) that the authors overcome considering all the relationships studied in an endogenous manner.



Casadio, P. and Paradiso, A. (2012), "Private sector balance, financial markets, and US cycle: a SVAR analysis", Journal of Economic Studies, Vol. 39 No. 6, pp. 709-723.



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Copyright © 2012, Emerald Group Publishing Limited

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