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Does interbank market matter for business cycle fluctuation? An estimated DSGE model with financial frictions for the Euro area

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  • Giri, Federico

Abstract

The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. In order to do that, we build a DSGE model with heterogeneous households and banks. The surplus bank can allocate its resources between interbank lending and risk free government bonds. This portfolio choice is affected by an exogenous counterpart risk shock on the interbank lending. An increase of the counterpart risk diverts funds from the interbank markets toward the risk free market. This mechanism allow us to capture the collapse of the interbank market and the fly to quality mechanism underlying the 2007 financial crisis. The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and especially the rise of the interest rates on the credit market during and just after the financial turmoil.

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  • Giri, Federico, 2014. "Does interbank market matter for business cycle fluctuation? An estimated DSGE model with financial frictions for the Euro area," FinMaP-Working Papers 27, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
  • Handle: RePEc:zbw:fmpwps:27
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    Cited by:

    1. Khoshnevis , Maryam & Ahmadyan , Azam, 2017. "Modeling Basel Regulatory in DSGE with Emphasis on Adequacy Regulatory," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(4), pages 379-407, October.
    2. Georgios Georgiadis & Martina Jancokova, 2017. "Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks," GRU Working Paper Series GRU_2017_008, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    3. Shakeri , Abbas & Ahmadian , Azam, 2013. "A Model of Financial Shocks at Bank and Interbank of Iran (DSGE)," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 8(4), pages 19-58, October.

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    Keywords

    DSGE model; financial frictions; interbank market; Bayesian estimation;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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