How Important is the Credit Channel? An Empirical Study of the US Banking Crisis

22 Pages Posted: 28 Sep 2012

See all articles by Chunping Liu

Chunping Liu

affiliation not provided to SSRN

Patrick Minford

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

Date Written: September 2012

Abstract

We examine whether by adding a credit channel to the standard New Keynesian model we can account better for the behaviour of US macroeconomic data up to and including the banking crisis. We use the method of indirect inference which evaluates statistically how far a model’s simulated behaviour mimics the behaviour of the data. We find that the model with credit dominates the standard model by a substantial margin. The credit channel is the main contributor to the variation in the output gap during the crisis.

Keywords: bank crisis, credit channel, financial frictions, indirect inference

JEL Classification: C12, C52, E12, G01, G1

Suggested Citation

Liu, Chunping and Minford, Patrick, How Important is the Credit Channel? An Empirical Study of the US Banking Crisis (September 2012). CEPR Discussion Paper No. DP9142. Available at SSRN: https://ssrn.com/abstract=2153583

Chunping Liu (Contact Author)

affiliation not provided to SSRN ( email )

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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