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iDEA: DREXEL LIBRARIES E-REPOSITORY AND ARCHIVES

iDEA: DREXEL LIBRARIES E-REPOSITORY AND ARCHIVES

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The cyclical behavior of bank price-cost margins

Details
Title
The cyclical behavior of bank price-cost margins
Author(s)
Aliaga-Diaz, Roger; Olivero, Maria Pia
Keywords
Bank margins; Time varying markups; Business cycles; Financial accelerator
Date
2006-11
Abstract
When price-cost margins vary endogenously in response to aggregate shocks, their variation becomes an additional channel through which such shocks can affect economic activity. This was first recognized by Rotemberg and Woodford (1991 and 1992) and its implications have been widely studied in goods markets. Bernanke and Gertler (1989) and Bernanke, Gertler and Gilchrist (1998) study this accelerator effect in financial markets in theoretical frameworks. However, the cyclical behavior of price-cost margins in the market for credit has been given only scant empirical attention so far. The literature still lacks empirical evidence on this cyclicality as a necessary condition for the existence and importance of this financial accelerator. In this paper we attempt to start filling this gap and study the cyclical behavior of banks’ price-cost margins in the United States banking sector, using time series quarterly data for the period 1984-2005 and applying the methodology proposed by den Haan (2000) to study the comovement between variables. We find empirical evidence in support of the countercyclicality of margins, and are able to show that it is robust to controlling for the effects of credit risk and the term structure of interest rates. As a mechanism for the propagation of macroeconomic shocks, this cyclical behavior can have important implications for both stabilization policy and RBC theory.
Citation
Paper presented at the 2006 Southern Economic Association Annual Meetings, Charleston, SC.
URI
http://hdl.handle.net/1860/1836
In Collections
Drexel Research

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