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Banks and the Domestic and International Propagation of Macroeconomic and Financial Shocks

Kollmann, Robert (2010): Banks and the Domestic and International Propagation of Macroeconomic and Financial Shocks.

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Abstract

This paper incorporates a bank into a dynamic stochastic general equilibrium model. The bank collects deposits and makes loans to an entrepreneur, subject to a regulatory bank capital requirement. The presence of the bank dampens the response of real activity to TFP shocks, but it magnifies the effect of credit losses. An unanticipated credit loss reduces the bank’s capital, which raises the spread between loan and deposit rates, and triggers a sizable, but short-lived, fall in real activity. When the bank operates internationally, then a loan default shock in one country triggers a sizable fall in both domestic and foreign output.

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