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Banks and the Domestic and International Propagation of Macroeconomic and Financial Shocks

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  • Kollmann, Robert

Abstract

This paper incorporates a bank into a dynamic stochastic general equilibrium model. The bank collects deposits and makes loans to an entrepreneur, subject to a regulatory bank capital requirement. The presence of the bank dampens the response of real activity to TFP shocks, but it magnifies the effect of credit losses. An unanticipated credit loss reduces the bank’s capital, which raises the spread between loan and deposit rates, and triggers a sizable, but short-lived, fall in real activity. When the bank operates internationally, then a loan default shock in one country triggers a sizable fall in both domestic and foreign output.

Suggested Citation

  • Kollmann, Robert, 2010. "Banks and the Domestic and International Propagation of Macroeconomic and Financial Shocks," MPRA Paper 70349, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70349
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    File URL: https://mpra.ub.uni-muenchen.de/70349/1/MPRA_paper_70349.pdf
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    References listed on IDEAS

    as
    1. Gregory deWalque & Olivier Pierrard & Abdelaziz Rouabah, 2010. "Financial (In)Stability, Supervision and Liquidity Injections: A Dynamic General Equilibrium Approach," Economic Journal, Royal Economic Society, vol. 120(549), pages 1234-1261, December.
    2. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 71-105, September.
    3. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    4. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
    5. Marvin Goodfriend & Bennett T. McCallum, 2007. "Banking and interest rates in monetary policy analysis: a quantitative exploration," Proceedings, Federal Reserve Bank of San Francisco.
    6. Meh, Césaire A. & Moran, Kevin, 2010. "The role of bank capital in the propagation of shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 555-576, March.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Kollmann, Robert & Enders, Zeno & Müller, Gernot J., 2011. "Global banking and international business cycles," European Economic Review, Elsevier, vol. 55(3), pages 407-426, April.

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    More about this item

    Keywords

    Banks; international business cycles; financial crisis;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization
    • G2 - Financial Economics - - Financial Institutions and Services

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