Uncertainty shocks, banking frictions and economic activity

In this paper we investigate the effects of uncertainty shocks on economic activity in the euro area by using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shock...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2016-12, Vol.73, p.200-219
Main Authors: Bonciani, Dario, Roye, Björn van
Format: Article
Language:English
Subjects:
Financial frictions
Perturbation Methods
Stochastic Volatility
Third-order approximation
Uncertainty Shocks
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Summary:In this paper we investigate the effects of uncertainty shocks on economic activity in the euro area by using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in bank loan rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2016.09.008