Financial Business Cycles

Matteo Iacoviello

No 1116, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using Bayesian methods, I estimate a DSGE model where a recession is initiated by losses suffered by banks and exacerbated by their inability to extend credit to the real sector. The event triggering the recession has the workings of a redistribution shock: a small sector of the economy -- borrowers who use their home as collateral -- defaults on their loans. When banks hold little equity in excess of regulatory requirements, the losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial shock into a credit crunch, and, to the extent that some firms depend on bank credit, amplify and propagate the shock to the real economy. I find that redistribution and other financial shocks that affect leveraged sectors accounts for two-thirds of output collapse during the Great Recession.

Keywords: Banks; DSGE models; collateral constraints; housing; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E32 E44 E47 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-08-28
New Economics Papers: this item is included in nep-ban, nep-dge, nep-ger and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Financial Business Cycles (2015)
Working Paper: Financial Business Cycles (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1116

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