What causes banking crises? An empirical investigation for the world economy

Vo Phuong Mai Le, David Meenagh, A. Patrick Minford and Zhirong Ou

No E2013/3, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Eurozone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference,the resulting model passes the Wald test only on outputs in the two countries. We then extract the model's implied residuals on unfiltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but 'traditional' shocks explain the bulk of the crisis,the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a 'run' of bad shocks,based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises - provided the government acts swiftly to counteract such a shock as happened in this sample.

Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference (search for similar items in EconPapers)
JEL-codes: C1 E3 E44 E52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-03, Revised 2013-05
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: What Causes Banking Crises? An Empirical Investigation for the World Economy (2013)
Working Paper: What causes banking crises? An empirical investigation for the world economy (2013)
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