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Do banking shocks matter for the U.S. economy?

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  • Naohisa Hirakata
  • Nao Sudo
  • Kozo Ueda

Abstract

The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 86.

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Date of creation: 2011
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Handle: RePEc:fip:feddgw:86

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Keywords: Price levels ; Financial markets ; Monetary policy;

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  1. Kevin Moran & Cesaire Meh, 2004. "Bank Capital, Agency Costs, and Monetary Policy," 2004 Meeting Papers 318, Society for Economic Dynamics.
  2. Ferre De Graeve, 2008. "The external finance premium and the macroeconomy: US post-WWII evidence," Working Papers 0809, Federal Reserve Bank of Dallas.
  3. Peter N. Ireland, 2001. "Endogenous Money or Sticky Prices?," Boston College Working Papers in Economics 499, Boston College Department of Economics.
  4. Jermann, Urban & Quadrini, Vincenzo, 2009. "Macroeconomic Effects of Financial Shocks," CEPR Discussion Papers 7451, C.E.P.R. Discussion Papers.
  5. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2013. "Capital Injection, Monetary Policy, and Financial Accelerators," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 101-145, June.
  6. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2009. "Chained Credit Contracts and Financial Accelerators," IMES Discussion Paper Series 09-E-30, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  8. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  9. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
  10. Meier, André & Müller, Gernot J., 2005. "Fleshing out the monetary transmission mechanism: output composition and the role of financial frictions," Working Paper Series 0500, European Central Bank.
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Cited by:
  1. Christoph Gortz & John D Tsoukalas, 2012. "News and Financial Intermediation in Aggregate and Sectoral Fluctuations," Discussion Papers 12-10, Department of Economics, University of Birmingham.
  2. Yasuo Hirose & Takushi Kurozumi, 2012. "Do Investment-Specific Technological Changes Matter For Business Fluctuations? Evidence From Japan," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 208-230, 05.
  3. Hirakata, Naohisa & Sudo, Nao & Ueda, Kozo, 2013. "Is the net worth of financial intermediaries more important than that of non-financial firms?," Globalization and Monetary Policy Institute Working Paper 161, Federal Reserve Bank of Dallas.
  4. Sohei Kaihatsu & Takushi Kurozumi, 2014. "Sources of Business Fluctuations: Financial or Technology Shocks?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 224-242, April.
  5. Gunes Kamber & Christie Smith & Christoph Thoenissen, 2012. "Financial frictions and the role of investment specific technology shocks in the business cycle," CDMA Working Paper Series 201206, Centre for Dynamic Macroeconomic Analysis.
  6. Naohisa Hirakata & Takushi Kurozumi, 2013. "The International Finance Multiplier in Business Cycle Fluctuations," IMES Discussion Paper Series 13-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Scott Davis, 2010. "The adverse feedback loop and the effects of risk in both the real and financial sectors," Globalization and Monetary Policy Institute Working Paper 66, Federal Reserve Bank of Dallas.
  8. Yue Zhao, 2013. "Financial shocks in Japan : A case for a small open economy," KIER Working Papers 849, Kyoto University, Institute of Economic Research.
  9. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
  10. Muto, Ichiro & Sudo, Nao & Yoneyama, Shunichi, 2013. "Productivity Slowdown in Japan’s Lost Decades: How Much of It is Attributed to Financial Factors?," Dynare Working Papers 28, CEPREMAP.
  11. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  12. repec:pra:mprapa:38985 is not listed on IDEAS

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