Global banks, financial shocks, and international business cycles: Evidence from an estimated model

Abstract

This paper estimates a two-country model with a global bank, using U.S. and euro area (EA) data. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for U.S. real activity. Banking shocks account for about 2-5% of the unconditional variance of U.S. GDP and for 3-14% of the variance of EA GDP. During the 2007-09 recession, banking shocks accounted for about 15% of the fall in U.S. and EA GDP, and for more than a third of the fall in EA investment and employment. © 2013 The Ohio State University.