Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/270448 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. 2022-5
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We conduct a novel empirical analysis of the role of leverage of financial institutions for the transmission of financial shocks to the macroeconomy. For that purpose, we develop an endogenous regime-switching structural vector autoregressive model with time-varying transition probabilities that depend on the state of the economy. We propose new identification techniques for regime switching models. Recently developed theoretical models emphasize the role of bank balance sheets for the build-up of financial instabilities and the amplification of financial shocks. We build a market-based measure of leverage of financial institutions employing institution-level data and find empirical evidence that real effects of financial shocks are amplified by the leverage of financial institutions in a financial-constraint regime. We also find evidence of heterogeneity in how depository financial institutions, global systemically important banks, and selected nonbank financial institutions affect the transmission of shocks to the macroeconomy. Our results confirm the leverage ratio as a useful indicator from a policy perspective.
Subjects: 
regime switching
time-varying transition probabilities
financial shocks
leverage
bank and nonbank financial institutions
heterogeneity
JEL: 
C11
C32
C53
C55
E44
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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