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Do banking shocks matter for the U.S. economy?

  • Naohisa Hirakata
  • Nao Sudo
  • Kozo Ueda

The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 86.

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Date of creation: 2011
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Handle: RePEc:fip:feddgw:86
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  1. De Graeve, Ferre, 2008. "The external finance premium and the macroeconomy: US post-WWII evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3415-3440, November.
  2. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
  3. Kevin Moran & Cesaire Meh, 2004. "Bank Capital, Agency Costs, and Monetary Policy," 2004 Meeting Papers 318, Society for Economic Dynamics.
  4. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2009. "Chained Credit Contracts and Financial Accelerators," IMES Discussion Paper Series 09-E-30, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Urban Jermann & Vincenzo Quadrini, 2009. "Macroeconomic Effects of Financial Shocks," NBER Working Papers 15338, National Bureau of Economic Research, Inc.
  6. Peter N. Ireland, 2002. "Endogenous Money or Sticky Prices?," NBER Working Papers 9390, National Bureau of Economic Research, Inc.
  7. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  8. Naohisa Hirakata & Nao Sudo & Kozo Ueda, 2011. "Capital Injection, Monetary Policy, and Financial Accelerators," IMES Discussion Paper Series 11-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  9. Meier, André & Müller, Gernot J., 2005. "Fleshing out the monetary transmission mechanism: output composition and the role of financial frictions," Working Paper Series 0500, European Central Bank.
  10. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
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