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The cyclical behavior of bank price-cost margins
Please use this identifier to cite or link to this item:
http://hdl.handle.net/1860/1836
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| Title: | The cyclical behavior of bank price-cost margins |
| Authors: | Aliaga-Diaz, Roger
Olivero, Maria Pia |
| Keywords: | Bank margins
Time varying markups
Business cycles
Financial accelerator |
| Issue Date: | Nov-2006 |
| Citation: | Paper presented at the 2006 Southern Economic Association Annual Meetings, Charleston, SC. |
| 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. |
| URI: | http://hdl.handle.net/1860/1836 |
| Appears in Collections: | Faculty Research and Publications (Economics & International Business)
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