Empirical Analysis of Debt Deflation on a Macro- and Micro-Economic Levels
27 Pages Posted: 9 Dec 2013
Date Written: December 9, 2013
The paper explores the empirical macro- and microeconomic aspects of debt deflation. After performing VAR and Granger causality analysis on the quarterly 1980-2011 filtered macroeconomic data for the USA, we find evidence for the endogenous money supply theory. Highlighting the empirical observation of the recent credit cycles we put emphasis on the crucial role of banks in determining the broad money supply. Afterwards we use the microeconomic annual 2008-2010 data on 459 banks and a set of logit models to show the role of capital and leverage adequacy benchmarks in predicting bank failure. We find indirect evidence for the benchmarks to function as "self-fulfilling prophecies". After introducing control variables we find leverage ratio to be one of the most significant and robust predictors of bank failure. In addition, off-balance sheet risks tend to outweigh all other types of risks.
Keywords: endogenous money supply, debt deflation, credit cycles, vector autoregression, Granger causality, logit
JEL Classification: E51, E32, G21, C21, C22
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