The Instability of the Banking Sector and Macrodynamics: Theory and Empirics
AbstractThis paper studies the issue of local instability of the banking sector and how it may spillover to the macroeconomy. The banking sector is considered here as representing a wealth fund that accumulates capital assets, can heavily borrow and pays bonuses. We presume that the banking system 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 a multi-regime VAR (MRVAR). We estimate our model for the US with a MRVAR using a constructed financial stress index and industrial production. We also undertake an impulse-response study with an MRVAR which allows us to explore regime dependent shocks. We show that the shocks have asymmetric effects depending 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 demonstrate that the effects of monetary shocks are also dependent on the size of the shocks.
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Bibliographic InfoPaper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c016_080.
Length: 54 pages
Date of creation: Sep 2011
Date of revision:
Find related papers by JEL classification:
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-BAN-2012-05-15 (Banking)
- NEP-CBA-2012-05-15 (Central Banking)
- NEP-MAC-2012-05-15 (Macroeconomics)
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