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Caught in the US Subprime Meltdown 2007/2008: Germany Loses Its Wallet but Escapes Major Harm

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  • Stefan Kooths
  • Matthias Rieger

Abstract

The ongoing financial crisis so far cost the German financial sector 38 billion Euros due to losses on its mortgage-related subprime bank exposures. This paper looks for the impact of these losses on the real sector of the economy. First, the financial sector is looked at as part of the overall macro economy in order to identify the direct impact of the write-offs and devaluations of financial assets on value-added and employment in the financial industry. In the second part of the paper the financial sector's role as enabler of real investment is analyzed. So far, there is no significant evidence that the credit creation capacity of the German banking system as a whole was negatively affected (as indicated by stable money multiplier and base equity ratio values). In particular, the flow of credit to non-financial businesses remains intact despite heavy turmoil within the financial sector. Also, the overall interest rate for corporate lending did hardly in-crease. Econometrically, a switching disequilibrium model and a market-clearing approached were setup to test for excess demand during the crisis and any general impact of the crisis on the credit market respectively. The statistical tests turned out to be little helpful for quantifying any major effect. We conclude that despite the substantial financial losses there is no major negative spill-over from the banking sector to the real economy in Germany.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.89305.de/dp825.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 825.

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Length: 30 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwwpp:dp825

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Keywords: Subprime crisis; credit market; financial sector; value-added;

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  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Steven A. Sharpe, 1995. "Bank capitalization, regulation, and the credit crunch: a critical review of the research findings," Finance and Economics Discussion Series 95-20, Board of Governors of the Federal Reserve System (U.S.).
  9. Reich, Utz-Peter, 1991. "Concept and Definition of Income in the National Accounts," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(3), pages 235-47, September.
  10. Richard F. Syron, 1991. "Are we experiencing a credit crunch?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 3-10.
  11. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  12. Torsten Schmidt & Hiltrud Nehls, 2003. "Credit Crunch in Germany?," RWI Discussion Papers 0006, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
  13. Laffont, Jean-Jacques & Garcia, Rene, 1977. "Disequilibrium Econometrics for Business Loans," Econometrica, Econometric Society, vol. 45(5), pages 1187-1204, July.
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