Bank Leverage Cycles and the External Finance Premium

Ansgar Rannenberg

Journal of Money, Credit and Banking, 2016, vol. 48, issue 8, 1569-1612

Abstract: By combining the approaches of Gertler and Karadi (2011) (GK) and Bernanke, Gertler, and Gilchrist (1999) (BGG), I develop a Dynamic Stochastic General Equilibrium (DSGE) model with leverage constraints both in the banking and in the nonfinancial firm sector. I calibrate this “full model” to US data. The full model matches the relative volatility of the external finance premium and the procyclicality of bank leverage and thus outperforms both a BGG and a GK‐type model. For a reasonably calibrated combination of balance sheet shocks, the model reproduces a substantial share of the contraction (increase) of investment (the external finance premium) observed during the “Great Recession.”

Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:48:y:2016:i:8:p:1569-1612

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