Lecture 6 Slides - Economics 210c/236a Fall 2011 Christina...

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L ECTURE 6 The Effects of Financial Crises October 5, 2011 Economics 210c/236a Christina Romer Fall 2011 David Romer
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I. B EN B ERNANKE , “N ONMONETARY E FFECTS OF THE F INANCIAL C RISIS IN THE P ROPAGATION OF THE G REAT D EPRESSION
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Conceptual Framework Cost of Credit Intermediation (CCI) How do banking crises increase CCI? How do bankruptcies increase CCI?
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Macroeconomic Consequences of Increased CCI Aggregate supply effects Aggregate demand effects
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Bernanke’s Empirical Strategy Regress the growth rate of industrial production on unanticipated changes in the money supply. Unanticipated changes in the money supply calculated as residuals of a regression of money on four monthly lags of IP, M and prices.
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Bernanke’s Empirical Strategy (continued) Then adds two measures of financial crises: Change in deposits in suspended banks ( DBANKS ) Change in business failures ( DFAILS ) Looks for significance of coefficients on crisis variables. Also does dynamic simulations: How much of movement in IP do the equations explain?
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Evaluation of Bernanke’s Empirical Strategy Can it distinguish between money and credit stories? Omitted variable bias Importance of outliers
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-4,000 -3,000 -2,000 -1,000 0 1,000 2,000 3,000 4,000 -50 -40 -30 -20 -10 0 10 20 30 40 50 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 Change in Deposits in Suspended Banks (Millions) Growth in Industrial Production (Percent) Growth of Industrial Production and Change in Bank Suspensions, 1922-1941
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II. R EINHART AND R OGOFF , “T HE A FTERMATH OF F INANCIAL C RISES ,” C HAPTER 14 OF T HIS T IME IS D IFFERENT : E IGHT C ENTURIES OF F INANCIAL F OLLY
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Reinhart and Rogoff’s Definition “We mark a banking crisis by two types of events: (1) [systemic, severe] bank runs that lead to the closure, merging, or takeover by the public sector of one or more financial institutions and (2) [financial distress, milder] if there are no runs, the
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This note was uploaded on 02/28/2012 for the course ECON 210c taught by Professor Romer,c during the Fall '08 term at University of California, Berkeley.

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Lecture 6 Slides - Economics 210c/236a Fall 2011 Christina...

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