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Estimating a Banking-Macro Model Using a Multi-regime VAR

In: Advances in Non-linear Economic Modeling

Author

Listed:
  • Stefan Mittnik

    (University of Munich)

  • Willi Semmler

    (New School for Social Research)

Abstract

This paper indroduces a Banking-Macro Model and estimates the linkages using a Multi-Regime Vector Auto Regression (MRVAR). The model of the banking-macro link is a simplified version of the Brunnermeier and Sannikov (Am. Econ. Rev., 2014) model. The banking sector is represented as a wealth fund that accumulates capital assets, can heavily borrow and pays bonuses. We presume that the banking sector faces not only loan losses but is also exposed to a deterioration of its balances sheets due to adverse movements in asset prices. In contrast to previous studies that use the financial accelerator—which is locally amplifying but globally stable and mean reverting—our model shows local instability and globally multiple regimes. Whereas the financial accelerator leads, in terms of econometrics, to a one-regime VAR, we demonstrate the usefulness of the MRVAR approach. We estimate our model for the U.S. with a MRVAR using data on a constructed financial stress index and industrial production. We also conduct impulse-response analyses which allowing us to explore regime dependent shocks. We show that the shock profiles depend on the regime the economy is in and the size of the shocks. As to the recently discussed unconventional monetary policy of quantitative easing, we find that the relative effects of monetary shocks depend on the size of the shocks.

Suggested Citation

  • Stefan Mittnik & Willi Semmler, 2014. "Estimating a Banking-Macro Model Using a Multi-regime VAR," Dynamic Modeling and Econometrics in Economics and Finance, in: Frauke Schleer-van Gellecom (ed.), Advances in Non-linear Economic Modeling, edition 127, pages 3-40, Springer.
    • Handle: RePEc:spr:dymchp:978-3-642-42039-9_1
    DOI: 10.1007/978-3-642-42039-9_1
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    Citations

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    Cited by:

    1. Halvorsen, Jørn I. & Jacobsen, Dag Henning, 2016. "The bank-lending channel empirically revisited," Journal of Financial Stability, Elsevier, vol. 27(C), pages 95-105.
    2. Gaies, Brahim & Nakhli, Mohamed Sahbi & Ayadi, Rim & Sahut, Jean-Michel, 2022. "Exploring the causal links between investor sentiment and financial instability: A dynamic macro-financial analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 290-303.
    3. Ernst, Ekkehard & Semmler, Willi & Haider, Alexander, 2017. "Debt-deflation, financial market stress and regime change – Evidence from Europe using MRVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 115-139.
    4. Barrales-Ruiz, Jose & Mohammed, Mikidadu, 2021. "Financial regimes and oil prices," Resources Policy, Elsevier, vol. 74(C).

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