Working Paper: CEPR ID: DP9142
Authors: Chunping Liu; Patrick Minford
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 Codes: C12; C52; E12; G01; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit channel (E51) | output gap (E23) |
| banking sector conditions (G21) | credit channel (E51) |
| banking sector conditions (G21) | output gap (E23) |
| financial constraints (H60) | firm behavior (D21) |
| firm behavior (D21) | output gap (E23) |
| banking shocks (F65) | output gap (E23) |