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Bank leverage cycles and the external finance premium

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  • Rannenberg, Ansgar

Abstract

By combining the approaches of Gertler and Karadi (2011) and Bernanke et al. (1999), I develop a DSGE model with leverage constraints both in the banking and in the non-financial firm sector. I calibrate this full model to US data. In a world with only a monetary policy and a productivity shock, the full model matches the relative volatility of the external finance premium, while a BGG model generates too low volatility. The full model also matches the procyclicality of bank leverage, unlike the GK model. For a reasonably calibrated combination shocks to the net worth of banks and non-financial firms, the model reproduces a substantial share of the contraction (increase) of investment (the external finance premium) observed during the Great Recession.

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  • Rannenberg, Ansgar, 2013. "Bank leverage cycles and the external finance premium," Discussion Papers 55/2013, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:552013
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    4. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, February.
    5. Zhang, Min & Zhang, Yahong, 2022. "Monetary stimulus policy in China: The bank credit channel," China Economic Review, Elsevier, vol. 74(C).
    6. Michael Kühl, 2018. "The Effects of Government Bond Purchases on Leverage Constraints of Banks and Non-Financial Firms," International Journal of Central Banking, International Journal of Central Banking, vol. 14(4), pages 93-161, September.
    7. Luca Onorante & Matija Lozej & Ansgar Rannenberg, 2017. "Countercyclical capital regulation in a small open economy DSGE model," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Data needs and Statistics compilation for macroprudential analysis, volume 46, Bank for International Settlements.
    8. Kick, Thomas & Malinkovich, Swetlana & Merkl, Christian, 2020. "Loan supply and bank capital: A micro-macro linkage," Journal of International Money and Finance, Elsevier, vol. 104(C).
    9. Francesco Furlanetto & Francesco Ravazzolo & Samad Sarferaz, 2019. "Identification of Financial Factors in Economic Fluctuations," The Economic Journal, Royal Economic Society, vol. 129(617), pages 311-337.
    10. Boitani, Andrea & Punzo, Chiara, 2019. "Banks’ leverage behaviour in a two-agent new Keynesian model," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 347-359.
    11. Lieberknecht, Philipp, 2018. "Financial Frictions, the Phillips Curve and Monetary Policy," MPRA Paper 89429, University Library of Munich, Germany.
    12. Kühl, Michael, 2017. "Bank capital, the state contingency of banks’ assets and its role for the transmission of shocks," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 260-284.
    13. André Diniz & Bernardo Guimaraes, 2017. "How diabolic is the sovereign-bank loop? The effects of post-default fiscal policies," Discussion Papers 1705, Centre for Macroeconomics (CFM).
    14. Valerio Nispi Landi, 2017. "Capital controls, macroprudential measures and monetary policy interactions in an emerging economy," Temi di discussione (Economic working papers) 1154, Bank of Italy, Economic Research and International Relations Area.
    15. Konrad Kuhmann, 2023. "Firm Heterogeneity and the Transmission of Central Bank Credit Policy," Berlin School of Economics Discussion Papers 0012, Berlin School of Economics.
    16. Szabolcs Deak & Paul Levine & Afrasiab Mirza & Joseph Pearlman, 2020. "Is Price Level Targeting a Robust Monetary Rule?," Discussion Papers 20-27, Department of Economics, University of Birmingham.
    17. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    18. Paul Levine & Maryam Mirfatah & Joseph Pearlman & Stylianos Tsiaras, 2023. "Optimal Liquidity Provision and Interest Rate Rules: A Tale of Two Frictions," School of Economics Discussion Papers 1323, School of Economics, University of Surrey.
    19. Kühl, Michael, 2014. "Mitigating financial stress in a bank-financed economy: Equity injections into banks or purchases of assets?," Discussion Papers 19/2014, Deutsche Bundesbank.
    20. Paul Luk & Tianxiao Zheng, 2022. "Dynamics of Secured and Unsecured Debt Over the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 284-314, April.
    21. Elton Beqiraj & Giovanni Di Bartolomeo & Marco Di Pietro & Carolina Serpieri, 2017. "Resilience, crisis contagion, and vulnerability in Central Europe and the Baltics," JRC Research Reports JRC109632, Joint Research Centre.
    22. Diniz, Andre & Guimaraes, Bernardo, 2014. "Financial disruption as a cost of sovereign default: a quantitative assessment," LSE Research Online Documents on Economics 86329, London School of Economics and Political Science, LSE Library.
    23. Beqiraj, Elton & Di Bartolomeo, Giovanni & Di Pietro, Marco & Serpieri, Carolina, 2018. "Comparing Central Europe and the Baltic macro-economies: A Bayesian approach," EconStor Preprints 175242, ZBW - Leibniz Information Centre for Economics.
    24. Górajski, Mariusz & Kuchta, Zbigniew, 2023. "Coordination and non-coordination risks of monetary and macroprudential authorities: A robust welfare analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    leverage cycle; bank capital; financial accelerator; output effects of financial shocks;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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