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Uncertainty shocks, banking frictions and economic activity

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  • Bonciani, Dario
  • van Roye, Björn

Abstract

In this paper we investigate the effects of uncertainty shocks on economic activity in the euro area by using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogeneous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy. JEL Classification: E32, E52

Suggested Citation

  • Bonciani, Dario & van Roye, Björn, 2015. "Uncertainty shocks, banking frictions and economic activity," Working Paper Series 1825, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20151825
    Note: 2685109
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    More about this item

    Keywords

    financial frictions; Perturbation Methods; stochastic volatility; Third-order approximation; Uncertainty Shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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