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Financial intermediaries, credit Shocks and business cycles


  • Mimir, Yasin


This paper conducts a quantitative analysis of the role of financial shocks and credit frictions affecting the banking sector in driving U.S. business cycles. I first document three key business cycle stylized facts of aggregate financial variables in the U.S. banking sector: (i) Bank credit, deposits and loan spread are less volatile than output, while net worth and leverage ratio are more volatile, (ii) bank credit and net worth are procyclical, while deposits, leverage ratio and loan spread are countercyclical, and (iii) financial variables lead the output fluctuations by one to three quarters. I then present an equilibrium business cycle model with a financial sector, featuring a moral hazard problem between banks and its depositors, which leads to endogenous capital constraints for banks in obtaining funds from households. The model incorporates empirically-disciplined shocks to bank net worth (i.e. "financial shocks") that alter the ability of banks to borrow and to extend credit to non-financial businesses. I show that the benchmark model is able to deliver most of the above stylized facts. Financial shocks and credit frictions in banking sector are important not only for explaining the dynamics of financial variables but also for the dynamics of standard macroeconomic variables. Financial shocks play a major role in driving real fluctuations due to their impact on the tightness of bank capital constraint and the credit spread.

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  • Mimir, Yasin, 2012. "Financial intermediaries, credit Shocks and business cycles," MPRA Paper 39648, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39648

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    References listed on IDEAS

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    Cited by:

    1. Yaprak Tavman, 2015. "A comparative analysis of macroprudential policies," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 334-355.
    2. Mimir Yasin & Sunel Enes & Taşkın Temel, 2013. "Required reserves as a credit policy tool," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-58, June.

    More about this item


    Banks; Financial Fluctuations; Credit Frictions; Bank Equity; Real Fluctuations;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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