Financial shocks and the US business cycle

Abstract

Employing the financial accelerator (FA) model of Bernanke, Gertler and Gilchrist (1999) enhanced to include a shock to the FA mechanism, we construct and study shocks to the efficiency of the financial sector in post-war US business cycles. We find that financial shocks are very tightly linked with the onset of recessions, more so than TFP or monetary shocks. The financial shock invariably remains contractionary for sometime after recessions have ended. The shock accounts for a large part of the variance of GDP and is strongly negatively correlated with the external finance premium. Second-moments comparisons across variants of the model with and without a (stochastic) FA mechanism suggests the stochastic FA model helps us understand the data. JEL Classification: E30, E44, E52.

Inflation, human capital and Tobin's q

“…But during normal times, low in ‡ation and high growth can combine with a rising bank productivity to cause q to be even higher and the low frequency in ‡ation -q correlation to be more negative. As a third type of extension, the ability to explain q through the current model's shocks could be illustrated further by backing out the implied shocks of the model over time using data series as in Nolan and Thoenissen (2010).…”

Do Banking Shocks Matter for the U.S. Economy?

“…In the six panels, the solid blue line depicts the investment growth and white bar depicts a shock's contribution. 23 Among the three episodes of the economic downturn, the shocks to the FIs' net worth are the main driving force behind the investment decline during the …rst and third recessions. In particular, in the Great Recession that begins with …nancial turmoil and the collapse of FI institutions, their negative impacts are unprecedentedly large, lowering the investment for nearly three years.…”

Financial Frictions, Financial Shocks, and Aggregate Volatility

“…These types of wealth shocks were first introduced by Gilchrist and Leahy (2002). Recently, they have been explored by Christiano, Motto, and Rostagno (2010), Nolan andThoenissen (2009), andGilchrist, Ortiz, andZakrajsek (2009).…”