Hostname: page-component-586b7cd67f-g8jcs Total loading time: 0 Render date: 2024-11-26T07:20:28.416Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON LEVERAGE AND THE MACROECONOMY

Published online by Cambridge University Press:  13 June 2014

Khandokar Istiak  and
Apostolos Serletis
Khandokar Istiak
Affiliation:
University of Calgary
Apostolos Serletis*
Affiliation:
University of Calgary
*
Address correspondence to: Apostolos Serletis, Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada; e-mail: [email protected]; URL: http://econ.ucalgary.ca/serletis.htm.
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper we investigate the relationship between leverage and the level of economic activity in the United States, using quarterly data over the period 1951–2012. We address the question for five different measures of leverage—household leverage, nonfinancial firm leverage, commercial bank leverage, broker–dealer leverage, and shadow bank leverage—making a distinction between traditional banks and shadow banks, the latter being a consequence of financial innovation and deregulation in the financial services industry over the past 30 years. We investigate whether the relationship between leverage and the level of economic activity is nonlinear and asymmetric using slope-based tests as well as tests of the null hypothesis of symmetric impulse responses. Our results inform policymakers about the important distinction between traditional banks and the market-based financial intermediaries that have been at the center of the global financial crisis of 2007–2009. They also inform about the macroeconomic effects of the deleveraging process that began in 2008, as well as about the need for countercyclical macroprudential policies to reduce the procyclicality of the financial system.

Keywords

Financial Intermediary LeverageLeverage CyclesShadow Banking System
Type
Notes
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 429 - 445
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adrian, T., Etula, E., and Muir, T. (2013) Financial intermediaries and the cross-section of asset returns. Journal of Finance. Forthcoming.CrossRefGoogle Scholar
Adrian, T. and Shin, H.S. (2010) Liquidity and leverage. Journal of Financial Intermediation 19, 418–437.CrossRefGoogle Scholar
Adrian, T. and Shin, H.S. (2011) Financial intermediaries and monetary economics. In Friedman, B.M. and Woodford, M. (eds.), Monetary Economics, Vol. 3A, pp. 601–650. Amsterdam: North Holland.Google Scholar
Adrian, T. and Shin, H.S. (2013) Procyclical Leverage and Value-at-Risk. NBER Working Paper 18943.CrossRefGoogle Scholar
Bank of International Settlements (2009) Annual Report. Basel: Bank of International Settlements.Google Scholar
Barnett, W.A. (2012) Getting It Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy. Cambridge, MA: The MIT Press.Google Scholar
Barnett, W.A., Liu, J., Mattson, R.S., and van den Noort, J. (2013) The new CFS Divisia monetary aggregates: Design, construction, and data sources. Open Economies Review 24, 101–124.CrossRefGoogle Scholar
Belongia, M.T. and Ireland, P.N. (in press) The Barnett critique after three decades: A New Keynesian analysis. Journal of Econometrics.Google Scholar
Fostel, A. and Geanakoplos, J. (2012) Why does bad news increase volatility and decrease leverage? Journal of Economic Theory 147, 501–525.CrossRefGoogle Scholar
Geanakoplos, J. (2010a) Solving the present crisis and managing the leverage cycle. Federal Reserve Bank of New York Economic Policy Review (August), 101–131.CrossRefGoogle Scholar
Geanakoplos, J. (2010b) The leverage cycle. In Acemoglu, D., Rogof, K., f and Woodford, M. (eds.), NBER Macreoconomics Annual 24, pp. 1–65. Chicago: University of Chicago Press.Google Scholar
Greenlaw, D., Hatzius, J., Kashyap, A.K., and Shin, H.S. (2008) Leveraged losses: Lessons from the mortgage market meltdown. In Proceedings of the U.S. Monetary Policy Forum. Available at http://research.chicagobooth.edu/igm/docs/USMPF_FINAL_Print.pdf.Google Scholar
Hamilton, J.D. (1996) This is what happened to the oil price–macroeconomy relationship. Journal of Monetary Economics 38, 215–220.CrossRefGoogle Scholar
Hamilton, J.D. (2003) What is an oil shock? Journal of Econometrics 113, 363–398.CrossRefGoogle Scholar
Hamilton, J.D. (2011) Nonlinearities and the macroeconomic effects of oil prices. Macroeconomic Dynamics 15 (Supplement 3), 364–378.CrossRefGoogle Scholar
Herrera, A.M., Lagalo, L.G., and Wada, T. (2011) Oil price shocks and industrial production: Is the relationship linear? Macroeconomic Dynamics 15 (Supplement 3), 472–497.CrossRefGoogle Scholar
Kilian, L. and Vigfusson, R.J. (2011) Are the responses of the U.S. economy asymmetric in energy price increases and decreases? Quantitative Economics 2, 419–453.CrossRefGoogle Scholar
Mendoza, E.G. (2010) Sudden stops, financial crises, and leverage. American Economic Review 100, 1941–1966.CrossRefGoogle Scholar
Mishkin, F.S. (2011) Monetary policy strategy: Lessons from the crisis. In Jarocinski, M., Smets, F., and Thimann, C. (eds.), Monetary Policy Revisited: Lessons from the Crisis, pp. 67–118 (Sixth ECB Central Banking Conference). Frankfurt, Germany: European Central Bank.CrossRefGoogle Scholar
Serletis, A. and Elder, J. (2011) Introduction to Macroeconomic Dynamics special issue on oil price shocks. Macroeconomic Dynamics 15 (Supplement 3), 327–336.CrossRefGoogle Scholar
Serletis, A. and Gogas, P. (2014) Divisia monetary aggregates, the great ratios, and classical money demand functions. Journal of Money, Credit and Banking 46, 229–241.CrossRefGoogle Scholar
Serletis, A., Istiak, K., and Gogas, P. (2013) Interest rates, leverage, and money. Open Economies Review 24, 51–78.CrossRefGoogle Scholar