Dealing with financial instability through the DSGE modeling approach and banking intermediation

Document Type : Research Paper

Authors

1 Ph.D. Student, Department of Economics, Qazvin Unit, Islamic Azad University, Qazvin, Iran

2 Assistant Professor, Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, Iran

3 Assistant Professor, Faculity of Economics, University of Allameh Tabataba'i, Tehran, Iran

Abstract

In the dynamic stochastic general equilibrium (DSGE) literature, there is an increasing awareness of the role that the banking sector can play in macroeconomic activities. We present a DSGE model with financial intermediation as in Gertler and Karadi (2011). Following a positive technology shock, the deposit rate declines slightly and this shock gradually increases the output, consumption, and net worth, After the shock, the lending banks reduce and a substantial decline occurs in the excess bank capital. This is because banks prefer to rely on cheaper funds from the central bank. The markup wage and price shocks naturally induce an increase in the markup, which is associated with a fall in real output and real wages, As expected, a positive shock in markup has a significant negative effect on the investment, consumption and net worth. Following a monetary shock, the investment, employment and inflation rate decreases, the willingness to deposit increases, and consequently the nominal deposit rate decreases. Finally, the shock of the government expenditure increases prices, wages, nominal rates and the net worth of financial intermediaries.

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References

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The Journal of Economic Policy
Volume 12, Issue 23
October 2020
Pages 189-223

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