Banking Panic Risk and Macroeconomic Uncertainty

Mikkelsen, Jakob and Poeschl, Johannes (2019): Banking Panic Risk and Macroeconomic Uncertainty.

Abstract

We show that systemic risk in the banking sector breeds macroeconomic uncertainty. In a production economy with a banking sector, financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility, increases risk premia on asset prices and yields a new benefit from countercyclical bank capital buffers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking Panics, Systemic Risk, Endogenous Uncertainty, Macroprudential Policy
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Adrian, T., N. Boyarchenko, and D. Giannone (2019): Vulnerable Growth, American Economic Review.

Akinci, O., and A. Queralto (2017): Credit Spreads, Financial Crises, and Macroprudential Policy, Federal Reserve Bank of New York Staff Reports, 802(November 2016).

Alessandri, P., and H. Mumtaz (2019): Financial regimes and uncertainty shocks, Journal of Monetary Economics, 101, 31-46.

Angeloni, I., and E. Faia (2013): Capital Regulation and Monetary Policy with Fragile Banks, Journal of Monetary Economics, 60(3), 311-324.

Barro, R. J. (2009): \Rare Disasters, Asset Prices, and Welfare Costs, American Eco- nomic Review, 99(1), 243{264. 35 Basel Committee on Banking Supervision (2010): Basel III: A global regulatory framework for more resilient banks and banking systems.

Basu, S., and B. Bundick (2017): Uncertainty Shocks in a Model of Effective Demand, Econometrica, 85(3), 937-958.

Begenau, J. (2019): Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model, Journal of Financial Economics.

Begenau, J., and T. Landvoigt (2018): Financial Regulation in a Quantitative Model of The Modern Banking System," SSRN Electronic Journal.

Bernanke, B. S., M. Gertler, and S. Gilchrist (1999): The Financial Accelerator in a Quantitative Business Cycle Framework, in Handbook of Macroeconomics, vol. 1.

Bianchi, J. (2011): Overborrowing and Systemic Externalities in the Business Cycle, American Economic Review, 101(7), 3400-3426.

Bianchi, J., and E. G. Mendoza (2018): Optimal Time-Consistent Macroprudential Policy, Journal of Political Economy, 126(2), 588-634.

Born, B., and J. Pfeifer (2014): Policy risk and the business cycle, Journal of Monetary Economics, 68, 68-85.

Born, B., and J. Pfeifer (2019): Uncertainty-driven business cycles: assessing the markup channel, Unpublished Manuscript.

Brunnermeier, M. K., and Y. Sannikov (2014): A Macroeconomic Model with a Financial Sector, American Economic Review, 104(2), 379-421.

Cacciatore, M., and F. Ravenna (2018): Uncertainty,Wages, and the Business Cycle, Unpublished Manuscript.

Calvo, G. A. (1988): Servicing the Public Debt: The Role of Expectations, American Economic Review, 78(4), 647-661.

Christiano, L. J. (2018): Discussion of "A Macroeconomic Model with Financial Panics by Gertler, Kiyotaki and Prestipino," Frontiers of Macroeconomics with Applications in China.

Cole, H. L., and T. J. Kehoe (2000): Self-Fulfilling Debt Crises, Review of Economic Studies, 67(1), 91-116.

Corbae, D., and P. D'Erasmo (2018): Capital Requirements in a Quantitative Model of Banking Industry Dynamics, Ssrn.

Davila, E., and A. Korinek (2017): Pecuniary Externalities in Economies with Financial Frictions, Review of Economic Studies, 84(4), 1869.

Di Tella, S. (2019): Optimal Regulation of Financial Intermediaries, American Economic Review, 109(1), 271-313.

Diamond, D. W., and P. H. Dybvig (1983): Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy, 91(3), 401-419.

Epstein, L. G., and S. E. Zin (1989): Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework, Econometrica, 57(4), 937-969.

Fajgelbaum, P. D., E. Schaal, and M. Taschereau-Dumouchel (2017): Uncertainty Traps, The Quarterly Journal of Economics, 132(4), 1641-1692.

Faria-e Castro, M. (2019): A Quantitative Analysis of Countercyclical Capital Buffers, Federal Reserve Bank of St. Louis Working Paper Series.37

Fernandez-Villaverde, J., P. Guerron-Quintana, K. Kuester, and J. Rubio-Ramirez (2015): Fiscal Volatility Shocks and Economic Activity, American Economic Review, 105(11), 3352-3384.

Ferrante, F. (2018): Risky lending, bank leverage and unconventional monetary policy, Journal of Monetary Economics.

Gersbach, H., and J.-C. Rochet (2017): Capital regulation and credit fluctuations, Journal of Monetary Economics, 90, 113-124.

Gertler, M., and P. Karadi (2011): A Model of Unconventional Monetary Policy, Journal of Monetary Economics, 58, 17-34.

Gertler, M., and N. Kiyotaki (2015): Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy, American Economic Review, 105(7), 2011-2043.

Gertler, M., N. Kiyotaki, and A. Prestipino (2016): Anticipated Banking Panics, American Economic Review, 106(5), 554-559.

Gertler, M., N. Kiyotaki, and A. Prestipino (2019): A Macroeconomic Model with Financial Panics, Review of Economic Studies.

Gertler, M., N. Kiyotaki, and A. Queralto (2012): Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, 59, S17-S34.

Giglio, S., B. Kelly, and S. Pruitt (2016): Systemic risk and the macroeconomy: An empirical evaluation, Journal of Financial Economics, 119(3), 457-471.

Gourio, F. (2012): Disaster Risk and Business Cycles," American Economic Review, 102(6), 2734-2766.

He, Z., and A. Krishnamurthy (2012): A Model of Capital and Crises," Review of Economic Studies, 79(2), 735-777.

Jurado, K., S. C. Ludvigson, and S. Ng (2015): Measuring Uncertainty, American Economic Review, 105(3), 1177-1216.

Laeven, L., and F. Valencia (2012): Systemic Banking Crises Database, International Monetary Fund, 61(2), 225-270.

Leduc, S., and Z. Liu (2016): Uncertainty shocks are aggregate demand shocks, Journal of Monetary Economics, 82, 20-35.

Mendoza, E. G. (2010): Sudden Stops, Financial Crises, and Leverage, American Economic Review, 100(5), 1941-1966.

Merton, R. C. (1973): An Intertemporal Capital Asset Pricing Model," Econometrica, 41(5), 867-887.

Paul, P. (2018): A Macroeconomic Model with Occasional Financial Crises, Federal Reserve Bank of San Francisco Working Paper.

Rudebusch, G. D., and E. T. Swanson (2012): The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks, American Economic Journal: Macroeconomics, 4(1), 105-143.

Thaler, D. (2018): Discussion of "A Macroeconomic Model with Financial Panics by Gertler, Kiyotaki and Prestipino," Macro Finance Workshop at the Bank of England.

Van Binsbergen, J. H., J. Fernaandez-Villaverde, R. S. Koijen, and J. Rubio-Ramirez (2012): The term structure of interest rates in a DSGE model with recursive preferences," Journal of Monetary Economics, 59(7), 634-648.