Precautionary Liquidity Shocks, Excess Reserves and Business CyclesCitation formats

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Precautionary Liquidity Shocks, Excess Reserves and Business Cycles. / Bratsiotis, George John; Theodoridis, Konstantinos.

2020. (Economics Discussion Paper Series ; No. EDP-2014).

Research output: Working paperDiscussion paper

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Bratsiotis GJ, Theodoridis K. Precautionary Liquidity Shocks, Excess Reserves and Business Cycles. 2020 Dec. (Economics Discussion Paper Series ; EDP-2014).

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Bratsiotis, George John ; Theodoridis, Konstantinos. / Precautionary Liquidity Shocks, Excess Reserves and Business Cycles. 2020. (Economics Discussion Paper Series ; EDP-2014).

Bibtex

@techreport{cc7577e6504f4485984576c2e282bf15,
title = "Precautionary Liquidity Shocks, Excess Reserves and Business Cycles",
abstract = "This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to {"}lend{"} to the real economy induced by an exogenous change in financial intermediaries' preference for {"}high{"} liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to rms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risk in the economy and the responsiveness of banks to potential risk.",
keywords = "SVAR, Sign and Zero restrictions, DSGE, Precautionary Liquidity Shock, Excess Reserves, Risk, Financial Intermediation",
author = "Bratsiotis, {George John} and Konstantinos Theodoridis",
year = "2020",
month = dec,
language = "English",
series = "Economics Discussion Paper Series ",
publisher = "University of Manchester",
number = "EDP-2014",
type = "WorkingPaper",
institution = "University of Manchester",

}

RIS

TY - UNPB

T1 - Precautionary Liquidity Shocks, Excess Reserves and Business Cycles

AU - Bratsiotis, George John

AU - Theodoridis, Konstantinos

PY - 2020/12

Y1 - 2020/12

N2 - This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to "lend" to the real economy induced by an exogenous change in financial intermediaries' preference for "high" liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to rms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risk in the economy and the responsiveness of banks to potential risk.

AB - This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to "lend" to the real economy induced by an exogenous change in financial intermediaries' preference for "high" liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to rms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risk in the economy and the responsiveness of banks to potential risk.

KW - SVAR

KW - Sign and Zero restrictions

KW - DSGE

KW - Precautionary Liquidity Shock

KW - Excess Reserves

KW - Risk

KW - Financial Intermediation

M3 - Discussion paper

T3 - Economics Discussion Paper Series

BT - Precautionary Liquidity Shocks, Excess Reserves and Business Cycles

ER -