How important is the credit channel? An empirical study of the US banking crisis

How important is the credit channel? An empirical study of the US banking crisis
Document type
Working Paper
Author(s)
Liu, Chunping Minford, Patrick
Publisher
Cardiff Business School
Date of publication
17 September 2012
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Report

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We examine whether by adding a credit channel to the standard New Keynesian model we can account better for the behaviour of US macro-economic data up to and including the banking crisis. We use the method of indirect inference which evaluates statistically how far a model's simulated behaviour mimics the behaviour of the data. We find that the model with credit dominates the standard model by a substantial margin. The credit channel is the main contributor to the variation in the output gap during the crisis.

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