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Are You a Lehman, Brother? Interbank Uncertainty in a DSGE Model

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  • Grimme, Christian
  • Siemsen, Thomas

Abstract

Did the increase in counterparty risk perception in the interbank market since autumn 2007 contribute to the severe contraction of the US economy? To address this question we introduce interbank market uncertainty in a DSGE model with frictional financial intermediation. Interbank uncertainty is modeled as exogenous change in the dispersion of beliefs about the fraction of interbank loans expected to be repaid. In our model higher uncertainty in wholesale banking leads to reductions in interbank lending activities as banks become more funding constraint. This induces a deleveraging process which reduces loans to firms and investment severely.

Suggested Citation

  • Grimme, Christian & Siemsen, Thomas, 2014. "Are You a Lehman, Brother? Interbank Uncertainty in a DSGE Model," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100498, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100498
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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