Working Paper: CEPR ID: DP9392
Authors: Vo Phuong Mai Le; David Meenagh; Patrick Minford; Zhirong Ou
Abstract: We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model?s implied residuals on unfi?ltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but ?traditional? shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a ?run? of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises ? provided the government acts swiftly to counteract such a shock as happened in this sample.
Keywords: banking; DSGE; indirect inference
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking shocks (F65) | Worsen banking crises (F65) |
| Traditional shocks (E32) | Account for bulk of banking crises (F65) |
| Nonstationarity of productivity shocks (O49) | Crises tend to occur (H12) |
| Financial shocks + Swift government intervention (F65) | Precipitate crises (H12) |