Do Banking Shocks Matter for the U.S. Economy?

Naohisa Hirakata, Nao Sudo and Kozo Ueda

No 10-E-13, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: Recent financial turmoil and existing empirical evidence suggest that adverse shocks to the financial intermediary (FI) sector cause substantial economic downturns. The quantitative significance of these shocks to the U.S. business cycle, however, has not received much attention up to now. To determine the importance of these shocks, we estimate a sticky-price dynamic stochastic general equilibrium model with what we describe as chained credit contracts. In this model, credit- constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. Using Bayesian estimation, we extract the shocks to the FIs' net worth. The shocks are cyclical, typically negative during a recession, such as the one that began in 2007. Their effects are persistent, lowering economic activity for several quarters after the recessionary trough. According to the variance decomposition, shocks to the FI sector are a main source of the spread variations, explaining 39% of the FIs' borrowing spread and 23% of the entrepreneurial borrowing spread. At the same time, these shocks play an important but not dominant role for investment, accounting for 15% of its variations.

Keywords: Monetary Policy; Financial Accelerators; Financial Intermediaries; Chained Credit Contracts (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Do banking shocks matter for the U.S. economy? (2011)
Working Paper: Do banking shocks matter for the U.S. economy? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:10-e-13

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