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What Causes Banking Crises? An Empirical Investigation for the World Economy

Listed author(s):
  • Vo Le

    ()

  • David Meenagh
  • Patrick Minford
  • Zhirong Ou

    ()

We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model’s implied residuals on unfiltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but ‘traditional’ shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises—provided the government acts swiftly to counteract such a shock as happened in this sample. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s11079-013-9274-8
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 24 (2013)
Issue (Month): 4 (September)
Pages: 581-611

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Handle: RePEc:kap:openec:v:24:y:2013:i:4:p:581-611
DOI: 10.1007/s11079-013-9274-8
Contact details of provider: Web page: http://www.springer.com

Order Information: Web: http://www.springer.com/economics/international+economics/journal/11079/PS2

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