Corporate credit, stock price inflation and economic fluctuations

Abstract

This study analyses the empirical interaction between real corporate credit, real income, real stock prices, the short-term interest rate and inflation for the Netherlands and the USA. The framework is based on a five-variable structural vector error correction model which identifies the permanent and temporary shocks within the system. Erratic shocks in the real amount of corporate credit and in stock prices could potentially have some impact on inflation in the case of the USA and on real output in the Netherlands. However, the structural VAR analysis also shows that the above-mentioned erratic shocks only explain a small proportion of the variation in inflation and economic activity, and inflation objective shifts and supply side shocks are much more important determinants for economic fluctuations.