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Financial intermediaries, credit Shocks and business cycles

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  • Mimir, Yasin

Abstract

This paper conducts a quantitative analysis of the role of financial shocks and credit frictions affecting the banking sector in driving U.S. business cycles. I first document three key business cycle stylized facts of aggregate financial variables in the U.S. banking sector: (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium business cycle model with a financial sector, featuring a moral hazard problem between banks and its depositors, which leads to endogenous capital constraints for banks in obtaining funds from households. The model incorporates empirically-disciplined shocks to bank net worth (i.e. "financial shocks") that alter the ability of banks to borrow and to extend credit to non-financial businesses. I show that the benchmark model is able to deliver most of the above stylized facts. Financial shocks and credit frictions in banking sector are important not only for explaining the dynamics of financial variables but also for the dynamics of standard macroeconomic variables. Financial shocks play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39648.

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Date of creation: May 2012
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Handle: RePEc:pra:mprapa:39648

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Keywords: Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations;

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  1. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers 08-36, Bank of Canada.
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  18. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
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Cited by:
  1. Yasin Mimir & Enes Sunel & Temel Taskin, 2012. "Required Reserves as a Credit Policy Tool," Working Papers 1224, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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