Working Paper

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

Abstract: The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.

JEL Classification: E31; E44; E52;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2011

Number: 86

Note: Published as: Hirakata, Naohisa, Nao Sudo and Kozo Ueda (2011), "Do Banking Shocks Matter for the U.S. Economy?" Journal of International Economic Dynamics and Control 35 (12): 2042-2063.