The transmission of financial shocks in an estimated DSGE model with housing and banking

Xinyu Ge, Xiao-Lin Li and Ling Zheng

Economic Modelling, 2020, vol. 89, issue C, 215-231

Abstract: We develop a dynamic stochastic general equilibrium (DSGE) model with housing and banking to study the transmission of financial shocks between the financial and real sectors. A deterioration in the bank's balance sheet induced by financial shocks could have amplified and persistent impacts on real activities. The amplification of the shocks are originated from financial frictions tied to households and banks. We find that a disruption in bank net worth initiated by capital quality shocks generates a decline in household loans, house prices and output. Bank liquidity shocks also have negative effects on these variables. Housing preference shocks could generate a positive comovement between house prices and output. All these findings are qualitatively consistent with empirical evidence, suggesting that these financial shocks are critical to the dynamics of house prices and other macroeconomic variables.

Keywords: Banking; Housing; Business cycle; DSGE models; Financial shocks; Financial intermediation (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 G21 R31 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:89:y:2020:i:c:p:215-231

DOI: 10.1016/j.econmod.2019.09.056

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