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Tracing the causes of the banking crisis

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  • Vo Phuong Mai Le
  • David Meenagh
  • Patrick Minford

Abstract

We add the Bernanke–Gertler–Gilchrist model to a modified version of the Smets–Wouters model of the U.S. in order to explore the causes of the banking crisis. The innovation of this article is estimating the model using unfiltered data allowing for non-stationary shocks in order to replicate how the model predicts the crisis. We find that ‘traditional shocks’ account for most of the fluctuations in macroeconomic variables; 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 64 years and when they occur around 10% 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.

Suggested Citation

  • Vo Phuong Mai Le & David Meenagh & Patrick Minford, 2017. "Tracing the causes of the banking crisis," Applied Economics, Taylor & Francis Journals, vol. 49(43), pages 4351-4362, September.
  • Handle: RePEc:taf:applec:v:49:y:2017:i:43:p:4351-4362
    DOI: 10.1080/00036846.2017.1282145
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