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How important is the credit channel? An empirical study of the US banking crisis

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  • Liu, Chunping
  • Minford, Patrick

    ()
    (Cardiff Business School)

Abstract

We examine whether by adding a credit channel to the standard New Keynesian model we can account better for the behaviour of US macroeconomic data up to and including the banking crisis. We use the method of indirect inference which evaluates statistically how far a model's simulated behaviour mimics the behaviour of the data. We find that the model with credit dominates the standard model by a substantial margin. Credit shocks are the main contributor to the variation in the output gap during the crisis.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2012/22.

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Length: 32 pages
Date of creation: Aug 2012
Date of revision: Dec 2013
Handle: RePEc:cdf:wpaper:2012/22

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Keywords: financial frictions; credit channel; bank crisis; indirect inference;

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