Global Banks, Financial Shocks and International Business Cycles: Evidence from an Estimated Model
CAMA Working Paper 30/2013
46 Pages Posted: 8 Jun 2013
Date Written: May 2013
This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. Banking shocks account for about 3%-5% of the unconditional variance of US GDP and for 4%-14% of the variance of EA GDP. During the Great Recession (2007-09), banking shocks accounted for about 12%-20% of the fall in US and EA GDP, and for more than a third of the fall in EA investment and employment.
Keywords: financial crisis, global banking, real activity, investment, Bayesian econometrics
JEL Classification: F36, F37, E44, G21
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