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Overleveraging, financial fragility and the banking-macro link : theory and empirical evidence
Mittnik, Stefan
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Semmler, Willi
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URL:
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https://ub-madoc.bib.uni-mannheim.de/37455
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URN:
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urn:nbn:de:bsz:180-madoc-374554
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Document Type:
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Working paper
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Year of publication:
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2014
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The title of a journal, publication series:
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ZEW Discussion Papers
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Volume:
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14-110
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Place of publication:
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Mannheim
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Publication language:
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English
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Institution:
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Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
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MADOC publication series:
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Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
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Subject:
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330 Economics
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Classification:
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JEL:
E2 , E6 , C13,
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Abstract:
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We investigate consequences of overleveraging and financial-sector stress on real
economic activities. When banks become vulnerable, due to high leveraging, and
there is a strong feedback between the real and the financial sector, a regime of high
financial stress may arise. The vulnerability of the banking system in a high lever-
age and a high-stress regime can, through macro feedback effects, result in unstable
dynamics. To assess this question empirically, we employ a nonlinear, multi-regime
vector autoregression approach (MRVAR), to explore the consequences of instabili-
ties arising from regime dependent shocks. We analyze data on industrial production
and the IMF Financial Stress Index. In order to assess how output is affected by
the individual risk drivers making up the IMF index, we study eight economies -
the U.S., Canada, Japan and the UK, and for the four largest euro-zone economies,
namely, Germany, France, Italy, and Spain, using Granger-causality and nonlinear
impulse-response analysis. Our results strongly suggest that financial-sector stress,
exerts a strong, nonlinear influence on economic activity, but that individual risk
drivers affect economic activity rather differently across stress regimes and across
countries.
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