Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/65731
Authors: 
Zhang, Hongru
Year of Publication: 
2011
Series/Report no.: 
Cardiff Economics Working Papers E2011/7
Abstract: 
This paper extends Nolan and Thoenissen (2009), hence NT, model with an explicit financial intermediary that transfer funds from households to entrepreneurs subject to a well defined loan production function. The loan productivity shock is treated as the supply side financial disturbance. Together with NT.s net worth shock that resembles the credit demand perturbation, both of the two-sided shocks are robustly extracted by combining the model with US quarterly data. The two shocks are found to be tightly linked with the post-war recessions. Each recession happens when both of the two shocks become contractionary. A few potential economic downturns seem to have been avoided because of the expansion of credit which offset the simultaneous contraction of entrepreneurial net wealth. This new introduced shock has significant explanatory power for the variance of EFP and the model simulated EFP holds high correlation with various spreads as proxies for empirical EFP.
Subjects: 
DSGE modeling
corporate net wealth shock
loan productivity shock
external financing
shock construction
historical decomposition
variance decomposition
JEL: 
E32
E44
G21
Document Type: 
Working Paper

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