Can a Financial Crisis Cause a Structural Damage to Economic Indicator Linkages? A Linear Stochastic Approach

The purpose of this work is to investigate of the influence of a financial crisis to the structural model of the economy. Research interest of how a financial crisis interferes on major economic indicators, lead us to check whether there are noticeable changes on linkages of endogenous economic variables behaviour over time. The Great Recession of 2008 (Subprime Mortgages Crisis) is chosen to be investigated. Main American economic indicators abstracted from the area of monetary policy and macroeconomics, are chosen to be investigated. Market reactions on changes of the above variables are mentionable and loudly stated by research. Moreover, central banks policies joint with government economic planning is focused on such indicators to abhor crisis. But is the explanatory power of these endogenous variables stable over time, and more over how are they affecting the outcomes of an analysis if the crisis period is included in dataset.
Our approach is based on a period from 2000 to 2019. The 2008 crisis period is considered to yield from 01/01/2008 to 30/06/2009. Our research approach is based on calculating cross correlation matrices, cluster investigation and then Principal Components Analysis. Continuing with the PCA findings we construct a VAR model, and we imply Impulse Analysis on it. The methodology is applied first on the entire data set and then on the period before and after the crisis neglecting on purpose the crisis period. Our goal is to check the hypothesis that a major crisis can affect the linkages between major economic variables and the model that defines the economic policies. The findings of cross correlations indicate a severe change of the impact on some variable pairs. A possible discontinuity existence coincides with the crisis, we could say that market just before crisis is balancing on a “saddle equilibrium point” in a mathematical sense.
As we can observe from our findings this large perturbation, is likely to cause a major structural damage to the state economy. Thus, time is needed after a major crisis to redefine the prior existing model to make a new guideline for the future.