What Causes Banking Crises? An Empirical Investigation

28 Pages Posted: 28 Sep 2012

See all articles by Vo Phuong Mai Le

Vo Phuong Mai Le

Cardiff University - Cardiff Business School

David Meenagh

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Date Written: July 2012

Abstract

We add the Bernanke-Gertler-Gilchrist model to a modified version of the Smets-Wouters model of the US in order to explore the causes of the banking crisis. We test the model against the data on HP-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test on output, inflation and interest rates. We then extract the model's implied residuals on US unfiltered data since 1984 to replicate how the model predicts the crisis. The main banking shock tracks the unfolding `sub-prime' shock, which appears to have been authored mainly by US government intervention. This shock worsens the banking crisis but `traditional' shocks explain the bulk of the crisis; 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 40 years and when they occur around half 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.

Keywords: Banking, Bootstrap, Crisis, DSGE

JEL Classification: C32, C52, E1

Suggested Citation

Le, Vo Phuong Mai and Meenagh, David and Minford, Patrick, What Causes Banking Crises? An Empirical Investigation (July 2012). CEPR Discussion Paper No. DP9057. Available at SSRN: https://ssrn.com/abstract=2153508

Vo Phuong Mai Le (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

David Meenagh

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5198 (Phone)
+44 29 2087 4419 (Fax)

Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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