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Open Economies Review

, Volume 24, Issue 4, pp 581–611 | Cite as

What Causes Banking Crises? An Empirical Investigation for the World Economy

  • Vo Phuong Mai Le
  • David Meenagh
  • Patrick Minford
  • Zhirong OuEmail author
Research Article

Abstract

We add the Bernanke-Gertler-Gilchrist model to a world model consisting of the US, the Euro-zone and the Rest of the World in order to explore the causes of the banking crisis. We test the model against linear-detrended data and reestimate it by indirect inference; the resulting model passes the Wald test only on outputs in the two countries. We then extract the model’s implied residuals on unfiltered data to replicate how the model predicts the crisis. Banking shocks worsen the crisis but ‘traditional’ shocks explain the bulk of the crisis; the non-stationarity of the productivity shocks plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample Great Recessions occur on average once every quarter century. Financial shocks on their own, even when extreme, do not cause crises—provided the government acts swiftly to counteract such a shock as happened in this sample.

Keywords

DSGE Banking Crisis World model Bootstrap 

JEL Classifications

C32 C52 E1 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Vo Phuong Mai Le
    • 1
  • David Meenagh
    • 2
  • Patrick Minford
    • 2
    • 3
  • Zhirong Ou
    • 2
    Email author
  1. 1.University of SheffieldSheffieldUK
  2. 2.Cardiff UniversityCardiffUK
  3. 3.CEPRLondonUK

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