Are You a Lehman, Brother? Interbank Uncertainty in a DSGE Model

Christian Grimme and Thomas Siemsen

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: Did the increase in counterparty risk perception in the interbank market since autumn 2007 contribute to the severe contraction of the US economy? To address this question we introduce interbank market uncertainty in a DSGE model with frictional financial intermediation. Interbank uncertainty is modeled as exogenous change in the dispersion of beliefs about the fraction of interbank loans expected to be repaid. In our model higher uncertainty in wholesale banking leads to reductions in interbank lending activities as banks become more funding constraint. This induces a deleveraging process which reduces loans to firms and investment severely.

JEL-codes: E17 E32 E37 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100498

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