Precautionary liquidity shocks, excess reserves and business cycles

George J. Bratsiotis and Konstantinos Theodoridis

Journal of International Financial Markets, Institutions and Money, 2022, vol. 77, issue C

Abstract: This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the banking sector’s reluctance to lend to the real economy induced by an exogenous preference change for liquid assets. Through the lens of a DSGE model, the precautionary liquidity shock is shown to work through two channels: reserves (balance sheet) and the deposit rate (intertemporal effect). The overall effect is a downward co-movement in output, consumption, investment, and prices, which is amplified the higher are the long-run risks in the economy and banks’ responsiveness to potential risk.

Keywords: SVAR; Sign and zero restrictions; DSGE; Precautionary liquidity shock; Excess reserves; Deposit rate; Risk; Financial intermediation (search for similar items in EconPapers)
JEL-codes: C10 C32 E30 E43 E51 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Precautionary Liquidity Shocks, Excess Reserves and Business Cycles (2020)
Working Paper: Precautionary Liquidity Shocks, Excess Reserves and Business Cycles (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:77:y:2022:i:c:s1042443122000129

DOI: 10.1016/j.intfin.2022.101518

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