Tracing the causes of the banking crisis

Le, Vo ORCID: https://orcid.org/0000-0003-3374-9694, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947 and Minford, Anthony ORCID: https://orcid.org/0000-0003-2499-935X 2017. Tracing the causes of the banking crisis. Applied Economics 10.1080/00036846.2017.1282145

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Abstract

We add the Bernanke–Gertler–Gilchrist model to a modified version of the Smets–Wouters model of the U.S. in order to explore the causes of the banking crisis. The innovation of this article is estimating the model using unfiltered data allowing for non-stationary shocks in order to replicate how the model predicts the crisis. We find that ‘traditional shocks’ account for most of the fluctuations in macroeconomic variables; the non-stationarity of the productivity shock plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample they occur on average once every 64 years and when they occur around 10% are accompanied by financial crisis. 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:	Published Online
Status:	Published
Schools:	Advanced Research Computing @ Cardiff (ARCCA) Business (Including Economics)
Uncontrolled Keywords:	DSGE model, non-stationary data, financial accelerator, crises, banking, indirect inference
Publisher:	Routledge
ISSN:	0003-6846
Date of First Compliant Deposit:	6 February 2017
Date of Acceptance:	4 January 2017
Last Modified:	19 May 2024 18:47
URI:	https://orca.cardiff.ac.uk/id/eprint/97863

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