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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks, international business cycles, financial crisis
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; F - International Economics > F6 - Economic Impacts of Globalization; G - Financial Economics > G2 - Financial Institutions and Services

References

Devereux, M., J. Yetman, 2010. Leverage Constraints and the International Transmission of Shocks, Working Paper, University of British Columbia and BIS.

de Walque, G., O. Pierrard, A. Rouabah, 2010. Financial (In)Stability, Supervision, and Liquidity Injections: a Dynamic General Equilibrium Approach, Working Paper, National Bank of Belgium, forthcoming in: Economic Journal.

Gerali, A., S. Neri, L. Sessa, S. Signoretti, 2010. Credit and Banking in a DSGE Model of the Euro Area, Working Paper, Bank of Italy.

Goodfriend, M. and B.T. McCallum, 2007. Banking and Interest Rates in Monetary Policy Analysis: a Quantitative Exploration, Journal of Monetary Economics, Vol. 54, pp. 1480-1507.

Meh, C. and K. Moran, 2008. The Role of Bank Capital in the Propagation of Shocks, Journal of Economic Dynamics and Control , Vol. 34, pp.555-576.

Roeger, W., 2009. The Financial Crisis 2008 in the QUEST Model: Impact on Europe, Working Paper, EU Commission.

Van den Heuvel, S., 2008. The Welfare Cost of Bank Capital Requirements, Journal of Monetary Economics, Vol. 55, 298-320.