Asymmetric Macro-Financial Spillovers

Abstract

The 2008 financial crisis has shown that financial busts can influence the real economy. However, there is less evidence to suggest that the same holds for financial booms. Using a Markov-Switching vector autoregressive model and euro area data, I show that financial booms tend to be less procyclical than financial busts. To identify the sources of asymmetry, I estimate a non-linear DSGE model with a heterogeneous banking sector and an occasionally binding borrowing constraint. The model matches the key features of the data and shows that the borrowers' balance sheet channel accounts for the asymmetry in the macro-financial linkages. The muted macro-financial transmission during financial booms can be exploited for macroprudential policies. By comparing capital buffer rules with monetary policy 'leaningagainst-the-wind' rules, I find that countercyclical capital buffers improve welfare.

Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation

“…Guerrieri and Iacoviello (2017) estimate a model with occasionally binding collateral constraints and show that the contribution of rising house prices to business cycle fluctuations has become small during the U.S. housing boom, once the constraint became slack. Bluwstein (2017) estimates a nonlinear DSGE model with a heterogeneous banking sector and an occasionally binding borrowing constraint, and shows that the asymmetry in macrofinancial linkages arises from the borrowers' balance sheet channel. Our paper is the first to address the two key nonlinearities associated with the mortgage market at the same time in a fully fledged econometric framework.…”

Multiperiod loans, occasionally binding constraints and monetary policy: a quantitative evaluation

“…Guerrieri and Iacoviello (2017) estimate a model with occasionaly binding collateral constraints and show that the contribution of rising house prices to business cycle fluctuations has become small during the US housing boom, once the constraint became slack. Bluwstein (2017) estimates a nonlinear DSGE model with a heterogeneous banking sector and an occasionally binding borrowing constraint, and shows that the asymmetry in macro-financial linkages arises from the borrowers' balance sheet channel.…”

“…Bayesian random walk Metropolis-Hastings setup to estimate the posterior distribution but without applying a Kalman filter to evaluate the likelihood. Instead, to compute the likelihood, we use the method developed by Guerrieri and Iacoviello (2017) and applied in Bluwstein (2017), which builds upon the piecewise linear solution method and constructs the likelihood function by filtering the shock innovations,…”

Back to the Real Economy: The Effects of Risk Perception Shocks on the Term Premium and Bank Lending

“…The eects of a bust are likely to be larger when accounting for other non-linearities like occasionally binding constraints (see e.g. Bluwstein, 2017). bad boom would therefore has less macroeconomic implications for output than previously thought.…”