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

Listed author(s):
  • Ansgar Rannenberg

    ()

    (Deutsche Bundesbank, Economics Department)

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    The paper adds a moral hazard problem between banks and depositors as in Gertler and Karadi (2011) to a DSGE model with a costly state verification problem between entrepreneurs and banks as in Bernanke, Gertler and Girlchrist (1999, BGG). This modification amplifies the response of the external finance premium and the overall economy to monetary policy and productivity shocks. It allows the 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 simulation of a bank balance sheet shock produces a downturn of a magnitude similar to the "Great Recession".

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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp224en.pdf
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    Paper provided by National Bank of Belgium in its series Working Paper Research with number 224.

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    Length: 104 pages
    Date of creation: Apr 2012
    Handle: RePEc:nbb:reswpp:201204-224
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    1. Carlson Mark A & King Thomas & Lewis Kurt, 2011. "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-31, June.
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