Precautionary liquidity shocks, excess reserves and business cycles

Arbeitspapier

This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to "lend" to the real economy induced by an exogenous change in financial intermediaries' preference for "high" liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to firms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risks in the economy and the responsiveness of banks to potential risk.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Cardiff Economics Working Papers ; No. E2020/15

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Econometric and Statistical Methods and Methodology: General ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) ; Interest Rates: Determination, Term Structure, and Effects ; Money Supply; Credit; Money Multipliers ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Thema: SVAR ; Sign and Zero Restrictions ; DSGE ; Precautionary Liquidity Shock ; Excess Reserves ; Deposit Rate ; Risk ; Financial Intermediation

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Bratsiotis, George ; Theodoridis, Konstantinos
• Ereignis: Veröffentlichung
• (wer): Cardiff University, Cardiff Business School
• (wo): Cardiff
• (wann): 2020

Weitere Informationen

• Handle: http://hdl.handle.net/10419/250325
• Letzte Aktualisierung: 10.03.2025, 11:45 MEZ