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

Federico Giri

No 27, FinMaP-Working Papers from Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

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.

Keywords: DSGE model; financial frictions; interbank market; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E30 E44 E51 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Does interbank market matter for business cycle fluctuation? An estimated DSGE model with financial frictions for the Euro area (2018)
Working Paper: Does Interbank Market Matter for Business Cycle Fluctuation? An Estimated DSGE Model with Financial Frictions for the Euro Area (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fmpwps:27

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