Credit and banking in a DSGE model of the euro area
Andrea Gerali (),
Stefano Neri,
Luca Sessa () and
Federico Signoretti
No 740, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area
Abstract:
This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment.
Keywords: collateral constraints; banks; banking capital; sticky interest rates (search for similar items in EconPapers)
JEL-codes: E30 E32 E43 E51 E52 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-dge, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (922)
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Related works:
Journal Article: Credit and Banking in a DSGE Model of the Euro Area (2010)
Journal Article: Credit and Banking in a DSGE Model of the Euro Area (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_740_10
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