@techreport{cc7577e6504f4485984576c2e282bf15,
title = "Precautionary Liquidity Shocks, Excess Reserves and Business Cycles",
abstract = "This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to {"}lend{"} to the real economy induced by an exogenous change in financial intermediaries' preference for {"}high{"} liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to rms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risk in the economy and the responsiveness of banks to potential risk.",
keywords = "SVAR, Sign and Zero restrictions, DSGE, Precautionary Liquidity Shock, Excess Reserves, Risk, Financial Intermediation",
author = "Bratsiotis, {George John} and Konstantinos Theodoridis",
year = "2020",
month = dec,
language = "English",
series = "Economics Discussion Paper Series ",
publisher = "University of Manchester",
number = "EDP-2014",
type = "WorkingPaper",
institution = "University of Manchester",
}