Journal article
Macroeconomic Implications of "Deep Habits" in Banking
Journal of money, credit and banking, v 42(8), pp 1495-1521
01 Dec 2010
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
Recent empirical evidence shows that price-cost margins in the market for bank credit are countercyclical in the U.S. economy and that this cyclical behavior can be explained in part from the fact that switching banks is costly for customers (i.e., from a borrower hold-up effect). Our goal, in this paper, is to study the "financial accelerator" role of these countercyclical margins as a propagation mechanism of macroeconomic shocks. To do so, we apply the "deep habits" framework in Ravn, Schmitt-Grohe, and Uribe (2006) to financial markets to model this hold-up effect within a monopolistically competitive banking industry. We are able to reproduce the pattern of price-cost margins observed in the data, and to show that the real effects of aggregate total factor productivity shocks are larger the stronger the friction implied by borrower hold-up. Also, output, investment, and employment all become more volatile than in a standard model with constant margins in credit markets. An empirical contribution of our work is to provide structural estimates of the deep habits parameters for financial markets.
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Details
- Title
- Macroeconomic Implications of "Deep Habits" in Banking
- Creators
- Roger Aliaga-Diaz - The Vanguard GroupMaria Pia Olivero - María Pía Olivero is at Department of Economics, LeBow College of Business, Drexel University (E‐mail: maria.olivero@drexel.edu).
- Publication Details
- Journal of money, credit and banking, v 42(8), pp 1495-1521
- Publisher
- Wiley
- Number of pages
- 27
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000284647900002
- Scopus ID
- 2-s2.0-78649683089
- Other Identifier
- 991019170854604721
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- Collaboration types
- Industry collaboration
- Domestic collaboration
- Web of Science research areas
- Business, Finance
- Economics