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Bank Leverage Cycles and the External Finance Premium
Author(s) -
RANNENBERG ANSGAR
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12359
Subject(s) - dynamic stochastic general equilibrium , leverage (statistics) , financial accelerator , economics , volatility (finance) , balance sheet , great recession , monetary economics , leverage effect , econometrics , finance , monetary policy , autoregressive conditional heteroskedasticity , computer science , keynesian economics , machine learning
By combining the approaches of Gertler and Karadi (2011) (GK) and Bernanke, Gertler, and Gilchrist (1999) (BGG), I develop a Dynamic Stochastic General Equilibrium (DSGE) model with leverage constraints both in the banking and in the nonfinancial firm sector. I calibrate this “full model” to US data. The full model matches the relative volatility of the external finance premium and the procyclicality of bank leverage and thus outperforms both a BGG and a GK‐type model. For a reasonably calibrated combination of balance sheet shocks, the model reproduces a substantial share of the contraction (increase) of investment (the external finance premium) observed during the “Great Recession.”