Estimating a Banking-Macro Model for Europe Using a Multi-Regime VAR

39 Pages Posted: 27 Feb 2012

See all articles by Willi Semmler

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 27, 2012

Abstract

This paper introduces a Banking-Macro Model and estimates the linkages through a Multi-Regime VAR (MRVAR). We introduce a dynamic model which is akin to the Brunnermeier and Sannikov (BS) model (2010). The banking sector is exposed to instability due to adverse movements of asset prices and their impact on risk premia and credit spreads. In contrast to the standard model of the financial accelerator, exhibiting mean reversion, our model, similarly to BS (2010), exhibits local instability. Whereas the standard model leads, in terms of econometrics, to a one-regime VAR we argue for the use of a MRVAR. We estimate our model for EU countries with a MRVAR using a constructed financial stress index and industrial production for those countries. We undertake impulse-response studies with a MRVAR and explore regime dependency of shocks. We show that the shocks have asymmetric effects, depending on the growth regime of the economy, and on the size of the shocks. Small financial stress shocks may not matter, but large shocks are likely to have magnifying effects.

JEL Classification: E2, E6, C13

Suggested Citation

Semmler, Willi and Mittnik, Stefan, Estimating a Banking-Macro Model for Europe Using a Multi-Regime VAR (February 27, 2012). Available at SSRN: https://ssrn.com/abstract=2012106 or http://dx.doi.org/10.2139/ssrn.2012106

Willi Semmler (Contact Author)

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics ( email )

Olshausenstr. 40
Kiel, Schleswig-Holstein 24118
Germany

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Akademiestr.1/III
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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