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Do Banking Shocks Matter for the U.S. Economy?

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Author Info

  • Naohisa Hirakata

    (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

  • Nao Sudo

    (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp))

  • Kozo Ueda

    (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp))

Abstract

Recent financial turmoil and existing empirical evidence suggest that adverse shocks to the financial intermediary (FI) sector cause substantial economic downturns. The quantitative significance of these shocks to the U.S. business cycle, however, has not received much attention up to now. To determine the importance of these shocks, we estimate a sticky-price dynamic stochastic general equilibrium model with what we describe as chained credit contracts. In this model, credit- constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. Using Bayesian estimation, we extract the shocks to the FIs' net worth. The shocks are cyclical, typically negative during a recession, such as the one that began in 2007. Their effects are persistent, lowering economic activity for several quarters after the recessionary trough. According to the variance decomposition, shocks to the FI sector are a main source of the spread variations, explaining 39% of the FIs' borrowing spread and 23% of the entrepreneurial borrowing spread. At the same time, these shocks play an important but not dominant role for investment, accounting for 15% of its variations.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 10-E-13.

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Date of creation: Jul 2010
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Handle: RePEc:ime:imedps:10-e-13

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Keywords: Monetary Policy; Financial Accelerators; Financial Intermediaries; Chained Credit Contracts;

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References

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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. 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.
  3. 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.
  4. 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.
  5. Jermann, Urban & Quadrini, Vincenzo, 2009. "Macroeconomic Effects of Financial Shocks," CEPR Discussion Papers 7451, C.E.P.R. Discussion Papers.
  6. Kevin Moran & Cesaire Meh, 2004. "Bank Capital, Agency Costs, and Monetary Policy," 2004 Meeting Papers 318, Society for Economic Dynamics.
  7. 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.
  8. 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.
  9. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
  10. 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. 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.
  2. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. 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.
  6. Yue Zhao, 2013. "Financial shocks in Japan : A case for a small open economy," KIER Working Papers 849, Kyoto University, Institute of Economic Research.
  7. 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.
  8. 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.
  9. repec:pra:mprapa:38985 is not listed on IDEAS
  10. 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.
  11. 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.
  12. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.

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