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Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics

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  • Rannenberg, Ansgar

Abstract

I add a moral hazard problem between banks and depositors as in Gertler and Karadi (2009) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke et al. (1999) (BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows my model to match the volatility and correlation with output of the external finance premium, bank leverage, entrepreneurial leverage and other variables in US data better than a BGG-type model. A reasonably calibrated combination of balance sheet shocks produces a downturn of a magnitude similar to the "Great Recession". JEL Classification: E44, E43, E32

Suggested Citation

  • Rannenberg, Ansgar, 2012. "Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics," Working Paper Series 1487, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20121487
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    References listed on IDEAS

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    1. repec:eee:dyncon:v:78:y:2017:i:c:p:164-189 is not listed on IDEAS
    2. Bekiros, Stelios D. & Paccagnini, Alessia, 2015. "Macroprudential Policy And Forecasting Using Hybrid Dsge Models With Financial Frictions And State Space Markov-Switching Tvp-Vars," Macroeconomic Dynamics, Cambridge University Press, vol. 19(07), pages 1565-1592, October.
    3. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
    4. Villa, Stefania, 2013. "Financial frictions in the euro area: a Bayesian assessment," Working Paper Series 1521, European Central Bank.
    5. repec:rbp:esteco:ree-33-04 is not listed on IDEAS
    6. Gelain, Paolo & Ilbas, Pelin, 2017. "Monetary and macroprudential policies in an estimated model with financial intermediation," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 164-189.
    7. Meradj Mortezapouraghdam, 2016. "Three Essays on the Role of Frictions in the Economy," Sciences Po publications info:hdl:2441/293qice3lj8, Sciences Po.
    8. Javier García-Cicco & Markus Kirchner & Santiago Justel, 2014. "Financial Frictions and the Transmission of Foreign Shocks in Chile," Working Papers Central Bank of Chile 722, Central Bank of Chile.
    9. Beqiraj Elton & Di Bartolomeo Giovanni & Di Pietro Marco, 2016. "Financial crises, limited asset market participation, and banks balance sheet constraints," wp.comunite 00127, Department of Communication, University of Teramo.
    10. Javier García-Cicco & Markus Kirchner & Santiago Justel, 2015. "Domestic Financial Frictions and the Transmission of Foreign Shocks in Chile," Central Banking, Analysis, and Economic Policies Book Series,in: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.), Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 6, pages 159-222 Central Bank of Chile.

    More about this item

    Keywords

    bank capital; financial accelerator; Leverage cycle; output effects of financial shocks;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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