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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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Bibliographic Info

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. Peter N. Ireland, 2002. "Endogenous Money or Sticky Prices?," NBER Working Papers 9390, National Bureau of Economic Research, Inc.
  2. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2011. "Capital Injection, Monetary Policy, and Financial Accelerators," IMES Discussion Paper Series 11-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  3. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  4. Césaire Meh & Kevin Moran, 2004. "Bank Capital, Agency Costs, and Monetary Policy," Working Papers 04-6, Bank of Canada.
  5. F. Degraeve, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/482, Ghent University, Faculty of Economics and Business Administration.
  6. André Meier & Gernot J. Müller, 2005. "Fleshing out the monetary transmission mechanism - output composition and the role of financial frictions," Working Paper Series 500, European Central Bank.
  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. 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.
  9. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
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Cited by:
  1. Görtz, Christoph & Tsoukalas, John D., 2012. "News and Financial Intermediation in Aggregate and Sectoral Fluctuations," Dynare Working Papers 12, CEPREMAP.
  2. repec:pra:mprapa:38985 is not listed on IDEAS
  3. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  4. Yue Zhao, 2013. "Financial shocks in Japan : A case for a small open economy," KIER Working Papers 849, Kyoto University, Institute of Economic Research.
  5. Gunes Kamber & Christie Smith & Christoph Thoenissen, 2012. "Financial frictions and the role of investment specific technology shocks in the business cycle," CAMA Working Papers 2012-30, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  6. Hirose, Yasuo & Kurozumi, Takushi, 2011. "Do investment-specific technological changes matter for business fluctuations? Evidence from Japan," MPRA Paper 32944, University Library of Munich, Germany.
  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.

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