DP8985 Global Banks, Financial Shocks and International Business Cycles: Evidence from an Estimated Model

Author(s):	Robert Kollmann
Publication Date:	May 2012
Keyword(s):	Bayesian econometrics, financial crisis, global banking, investment, real activity
JEL(s):	E44, F36, F37, G21
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8985

This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. During the Great Recession (2007-09), banking shocks accounted for about 20% of the fall in US and EA GDP, and for more than half of the fall in EA investment and employment.