Do banking shocks matter for the U.S. economy?

Abstract

There is ample empirical evidence suggesting that adverse shocks to the …nan-cial intermediary (FI) sector cause large economic downturns. The quantitative signi…cance of these shocks to the U.S. business cycle, however, has not been studied much so far. To evaluate the importance of these shocks, we estimate the stickyprice dynamic stochastic general equilibrium (DSGE) model that incorporates the credit market imperfection associated with FIs. In this model, …nancial intermediaries (FIs), along with entrepreneurs, are credit constrained, and shocks to their net worth cause aggregate ‡uctuations through the …nancial accelerator mechanism. Using Bayesian estimation, we extract the shocks to the FIs'net worth. We …nd these e¤ects to be persistent, lowering economic activity for several quarters after the recessionary trough. According to variance decomposition, the shocks to the FI sector account for at least 10% of investment variation, but have a relatively minor in ‡uence on the variations in output and in ‡ation. During the …nancial crisis starting in 2007, shocks account for 24% of the decline in investment, 10% of the decline in output and 20% of the decline in in ‡ation.

Cross-border banking flows spillovers in the Eurozone: Evidence from an estimated DSGE model

“…It also increases the heterogeneity of investment cycles and the dispersion of current account positions. Negative consequences of net worth shocks have already been studied in the literature with financial globalization (Ueda, 2012) and without (Hirakata et al, 2011). Our results are in line with this literature.…”

“…As reported, most of the variance of the growth rate of activity, consumption and inflation is explained by real supply shocks, while the variance of investment, loan supply and interest rates are mainly affected by national financial shocks. These results are in line with the ones reported by Hirakata et al (2011). Remarkably, the contribution of financial shocks to the fluctuations in the rate of interbank and corporate loan growth rate are comparable (respectively around 46% and 48%).…”

Government Policy, Credit Markets, and Economic Activity*

“…The latter model resembles BGG closely, although we follow Nowobilski (2011) by assuming that the …nancial 5 There is now a large literature devoted to constructing quantitative dynamic, stochastic general equilibrium models for evaluating the consequences of government asset purchase policies. For a partial list of this work, see Ajello (2010), Bernanke, Gertler and Gilchrist (1999), Carlstrom and Fuerst (1997), Christiano, Motto and Rostagno, (2003, Curdia and Woodford (2009), Del Negro, Eggertsson, Ferrero and Kiyotaki, (2010), Dib (2010), Fisher (1999), Gertler and Karadi (2009), Gertler and Kiyotaki (2011), Hirakata, Sudo and Ueda (2009aUeda ( ,2009bUeda ( ,2010), Liu, Wang and Zha (2010), Meh and Moran (2010), Nowobilski (2011), Ueda (2009), Zeng (2011). 6 The Moore and Kiyotaki and Moore ideas are pursued quantitatively in Ajello (2010), and Del Negro, Eggertsson, Ferrero and Kiyotaki (2010).…”

“…In addition, the bank is perfectly diversi…ed across …rms so that in BGG, banks are perfectly safe. Other modi…cations of the BGG model that introduce risk in banking include for example, Hirakata, Sudo and Ueda (2009aUeda ( ,2009bUeda ( ,2010, Nowobilski (2011), Ueda (2009), and Zeng (2011). 16 To our knowledge, the …rst papers to consider the economic e¤ects of variations in microeconomic uncertainty are Williamson (1987) and Christiano, Motto and Rostagno (2003).…”

Chained Credit Contracts and Financial Accelerators

“…Hirakata, Sudo, and Ueda () extend the current model to a New Keynesian sticky‐price framework and investigate the implications of unconventional policies implemented. Also, Hirakata, Sudo, and Ueda () examine the relative significance of shocks to the FIs as compared to other shocks, including technology shocks, in explaining the U.S. business cycles. The focus of the current paper is different from that of these studies.…”