What causes banking crises? an empirical investigation for the world economy

Le, Vo Phuong Mai ORCID: https://orcid.org/0000-0003-3374-9694, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947, Minford, Anthony Patrick Leslie ORCID: https://orcid.org/0000-0003-2499-935X and Ou, Zhirong ORCID: https://orcid.org/0000-0002-4610-7183 2013. What causes banking crises? an empirical investigation for the world economy. Open Economies Review 24 (4) , pp. 581-611. 10.1007/s11079-013-9274-8

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Abstract

We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone 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 unfiltered 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.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Advanced Research Computing @ Cardiff (ARCCA) Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions
Uncontrolled Keywords:	DSGE; banking; crisis; world model; bootstrap; C32; C52; E1.
Publisher:	Springer
ISSN:	0923-7992
Last Modified:	27 Oct 2022 08:14
URI:	https://orca.cardiff.ac.uk/id/eprint/61657

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