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Enhancing the financial sector linkages in the Bureau for Economic Research’s core macroeconometric model

Christelle Grobler () and Ben Smit
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Christelle Grobler: Bureau for Economic Research, University of Stellenbosch

No 21/2015, Working Papers from Stellenbosch University, Department of Economics

Abstract: The recent Great Financial Crisis (GFC) highlighted the importance of the development of financial sector linkages in macroeconomic models. The aim of this paper is to present the enhanced linkages from the financial sector to real economic activity in the Bureau for Economic Research’s (BER) core traditional semi-structural quarterly macroeconometric model. While many central banks have developed DSGE-type models, many national treasuries and other institutions use models similar to the BER’s core model. There is a large body of available literature on incorporating the financial sector into DSGE-type models, but this literature is rather limited for more traditional forecasting models. An additional objective was to add to this body of literature in documenting the changes to the BER’s model. Apart from incorporating the BER’s finance-neutral measure of potential output (see Kemp, 2015), credit markets and assets prices are now model determined. Also, banking sector variables such as the capital adequacy and liquidity ratios as well as the EY Financial Services (as surveyed by the BER) indicators on the credit standards of retail banks influence lending rate spreads faced by households and firms. The aim was to broaden the monetary transmission mechanism in the model so that the financial sector has an explicit impact on real variables in addition to the usual interest rate and exchange rate channels. This is illustrated by comparing the results of a similar sized interest rate shock before and after the model enhancements.

Keywords: Macroeconometric model; banking sector; capital adequacy ratio; liquidity ratio; credit standards (search for similar items in EconPapers)
JEL-codes: E10 E17 E20 E27 E44 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mac
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