Working Paper: CEPR ID: DP8985
Authors: Robert Kollmann
Abstract: 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. During the Great Recession (2007-09), banking shocks accounted for about 20% of the fall in US and EA GDP, and for more than half of the fall in EA investment and employment.
Keywords: Bayesian econometrics; Financial crisis; Global banking; Investment; Real activity
JEL Codes: E44; F36; F37; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Global bank capital ratio (F65) | Loan rate spread (E43) |
| US loan loss (G33) | US GDP (E20) |
| US loan loss (G33) | EA GDP (D50) |
| Required bank capital ratio (G21) | US GDP (E20) |
| Required bank capital ratio (G21) | EA GDP (D50) |
| Banking shocks (F65) | US GDP volatility (N12) |
| Banking shocks (F65) | EA GDP volatility (F29) |
| Banking shocks (F65) | Fall in GDP during Great Recession (E20) |