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A Note on Leverage and the Macroeconomy

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  • Khandokar Istiak

    (University of Calgary)

  • Apostolos Serletis

    (University of Calgary)

Abstract

In this paper we investigate the relationship between leverage and the level of economic activity in the United States, using quarterly data over the 1951 to 2012 period. We address the question for …five different measures of leverage - —household leverage, non…financial fi…rm leverage, commercial bank leverage, broker-dealer leverage, and shadow bank leverage -— making a distinction between traditional banks and shadow banks, the latter being a consequence of fi…nancial innovation and deregulation in the …financial services industry over the past 30 years. We investigate whether the relationship between leverage and the level of economic activity is nonlinear and asymmetric using slope-based tests as well as tests of the null hypothesis of symmetric impulse responses, recently introduced by Kilian and Vigfusson (2011). Our results inform policymakers about the important distinction between traditional banks and market-based fi…nancial intermediaries that have been at the center of the global fi…nancial crisis of 2007-2009. They also inform about the macroeconomic effects of the deleveraging process that began in 2008 as well as about the need for countercyclical macroprudential policies to reduce the procyclicality of the fi…nancial system.

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Bibliographic Info

Paper provided by Department of Economics, University of Calgary in its series Working Papers with number 2014-45.

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Date of creation: 01 Apr 2014
Date of revision: 01 Apr 2014
Handle: RePEc:clg:wpaper:2014-45

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  1. Apostolos Serletis & Periklis Gogas, 2014. "Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 229-241, 02.
  2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
  3. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  4. Apostolos Serletis & Khandokar Istiak & Periklis Gogas, 2013. "Interest Rates, Leverage, and Money," Open Economies Review, Springer, vol. 24(1), pages 51-78, February.
  5. Apostolos Serletis, 2014. "Introduction to Macroeconomic Dynamics Special Issue on Complexity in Economic Systems," Working Papers 2014-40, Department of Economics, University of Calgary, revised 25 Feb 2014.
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