Uncertainty Shocks, Banking Frictions and Economic Activity

48 Pages Posted: 10 Jul 2015

See all articles by Dario Bonciani

Dario Bonciani

European University Institute

Björn van Roye

European Central Bank (ECB)

Date Written: July 10, 2015

Abstract

In this paper we investigate the effects of uncertainty shocks on economic activity in the euro area by using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy.

Keywords: Uncertainty Shocks, Financial frictions, Stochastic Volatility, Perturbation Methods, Third-order approximation

JEL Classification: E32, E52

Suggested Citation

Bonciani, Dario and van Roye, Björn, Uncertainty Shocks, Banking Frictions and Economic Activity (July 10, 2015). ECB Working Paper No. 1825, Available at SSRN: https://ssrn.com/abstract=2629067 or http://dx.doi.org/10.2139/ssrn.2629067

Dario Bonciani (Contact Author)

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Björn Van Roye

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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