What Causes Banking Crises? An Empirical Investigation for the World Economy

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 un…ltered 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.

Can a small New Keynesian model of the world economy with risk‐pooling match the facts?

“…However, after re‐estimation, the UIP model can jointly match the behaviour of the two outputs with a t‐statistic of 1.4 and Wald percentile of 92.6, thus a p ‐value of 0.074. This result is in line with the empirical finding of Le, Meenagh, Minford, and Ou (2013) that a large UIP‐based world model of the US and the EA, essentially following the full Smets–Wouters specification in both continents, matched a VAR using the subset of the two outputs.…”

Monetarism rides again? US monetary policy in a world of Quantitative Easing

“…However the hybrid model was able to reproduce the variances of the data; and it is this key feature that enables it to match the data behaviour overall more closely. Further changes were made by Le et al (2013) to incorporate a banking sector, following Bernanke et al (BGG, 1999).…”

“…However the hybrid model was able to reproduce the variances of the data; and it is this key feature that enables it to match the data behaviour overall more closely. Further changes were made by Le et al (2013) to incorporate a banking sector, following Bernanke et al (BGG, 1999).With this addition the model divides the production side into three distinct participants: as in SW, retailers and intermediate goods producers (now called entrepreneurs for a reason described later) and in addition, capital producers. Retailers function in the same way as before, operating in perfect competition to produce final goods by aggregating differentiated intermediate products using the Dixit-Stiglitz technology.…”

Banking and the Macroeconomy in China: A Banking Crisis Deferred?

“…In this paper we examine whether China's economy since the 1990s can be explained by a model with banking that has been successfully applied to the US (Le et al, 2012a) and with some but rather less success to a 'world' economy consisting of the US, the eurozone and the rest of the world (Le, Meenagh, Minford and Ou, 2013)). The model, developed from that of Smets and Wouters following Christiano et al (2005) with a banking sector due to Bernanke et al (1999), is only suitable for a large continental economy since it assumes a closed economy.…”