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Do banking shocks matter for the U.S. economy?

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Author Info

  • Hirakata, Naohisa
  • Sudo, Nao
  • Ueda, Kozo

Abstract

The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17% of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36% of the variations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 2042-2063

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2042-2063

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Monetary policy; Financial accelerators; Financial intermediaries; Chained credit contracts;

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References

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  1. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  2. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2011. "Capital Injection, Monetary Policy, and Financial Accelerators," IMES Discussion Paper Series 11-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  3. Ferre De Graeve, 2008. "The external finance premium and the macroeconomy: US post-WWII evidence," Working Papers 0809, Federal Reserve Bank of Dallas.
  4. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
  5. Césaire Meh & Kevin Moran, 2004. "Bank Capital, Agency Costs, and Monetary Policy," Working Papers 04-6, Bank of Canada.
  6. Peter N. Ireland, 2001. "Endogenous Money or Sticky Prices?," Boston College Working Papers in Economics 499, Boston College Department of Economics.
  7. Meier, André & Müller, Gernot J., 2005. "Fleshing out the monetary transmission mechanism: output composition and the role of financial frictions," Working Paper Series 0500, European Central Bank.
  8. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  9. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2009. "Chained Credit Contracts and Financial Accelerators," IMES Discussion Paper Series 09-E-30, Institute for Monetary and Economic Studies, Bank of Japan.
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Citations

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Cited by:
  1. Yue Zhao, 2013. "Financial shocks in Japan : A case for a small open economy," KIER Working Papers 849, Kyoto University, Institute of Economic Research.
  2. Hirose, Yasuo & Kurozumi, Takushi, 2011. "Do investment-specific technological changes matter for business fluctuations? Evidence from Japan," MPRA Paper 32944, University Library of Munich, Germany.
  3. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  4. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
  5. Sohei Kaihatsu & Takushi Kurozumi, 2014. "Sources of Business Fluctuations: Financial or Technology Shocks?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 224-242, April.
  6. Görtz, Christoph & Tsoukalas, John, 2011. "News and financial intermediation in aggregate and sectoral fluctuations," MPRA Paper 38986, University Library of Munich, Germany, revised Mar 2012.
  7. Gunes Kamber & Christie Smith & Christoph Thoenissen, 2012. "Financial frictions and the role of investment specific technology shocks in the business cycle," CAMA Working Papers 2012-30, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. Muto, Ichiro & Sudo, Nao & Yoneyama, Shunichi, 2013. "Productivity Slowdown in Japan’s Lost Decades: How Much of It is Attributed to Financial Factors?," Dynare Working Papers 28, CEPREMAP.
  9. repec:pra:mprapa:38985 is not listed on IDEAS
  10. Scott Davis, 2010. "The adverse feedback loop and the effects of risk in both the real and financial sectors," Globalization and Monetary Policy Institute Working Paper 66, Federal Reserve Bank of Dallas.
  11. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2013. "Is the net worth of financial intermediaries more important than that of non-financial firms?," Globalization and Monetary Policy Institute Working Paper 161, Federal Reserve Bank of Dallas.
  12. Naohisa Hirakata & Takushi Kurozumi, 2013. "The International Finance Multiplier in Business Cycle Fluctuations," IMES Discussion Paper Series 13-E-12, Institute for Monetary and Economic Studies, Bank of Japan.

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