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What causes banking crises? An empirical investigation

Le, Vo Phuong Mai, Meenagh, David and Minford, Patrick 2013. What causes banking crises? An empirical investigation. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

We add the Bernanke-Gertler-Gilchrist model to a modified version of the Smets-Wouters model of the US in order to explore the causes of the banking crisis. We then extract the model's implied residuals on US unfiltered data since 1984 to replicate how the model predicts the crisis. The main banking shock tracks the unfolding 'sub-prime' shock. This shock worsens the banking crisis but 'traditional' shocks explain the bulk of the crisis; the non-stationarity of the productivity shock plays a key role. Crises occur when there is a 'run' of bad shocks; based on this sample they occur on average once every 40 years and when they occur around half are accompanied by financial crisis. 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.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Advanced Research Computing @ Cardiff (ARCCA)
Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 18 May 2018 12:19
URI: http://orca.cf.ac.uk/id/eprint/77937

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