Credit and Banking in a DSGE Model of the Euro Area

62 Pages Posted: 12 May 2010  

Andrea Gerali

Bank of Italy

Stefano Neri

Bank of Italy

Luca Sessa

Bank of Italy

Federico Maria Signoretti

Bank of Italy

Date Written: January 11, 2010

Abstract

This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment.

Keywords: collateral constraints, banks, banking capital, sticky interest rates

JEL Classification: E30, E32, E43, E51, E52

Suggested Citation

Gerali, Andrea and Neri, Stefano and Sessa, Luca and Signoretti, Federico Maria, Credit and Banking in a DSGE Model of the Euro Area (January 11, 2010). Bank of Italy Temi di Discussione (Working Paper) No. 740. Available at SSRN: https://ssrn.com/abstract=1601937 or http://dx.doi.org/10.2139/ssrn.1601937

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Stefano Neri (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 2821 (Phone)

Luca Sessa

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Federico Maria Signoretti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
268
rank
102,177
Abstract Views
1,346
PlumX