Enhancing the financial sector linkages in the Bureau for Economic Research’s core macroeconometric model
Stellenbosch Working Paper Series No. WP21/2015Publication date: 2015
Author(s):
[protected email address] (Bureau for Economic Research, University of Stellenbosch)
The recent Great Financial Crisis (GFC) highlighted the importance of the development of financial sector linkages in macroeconomic models. The aim of this paper is to present the enhanced linkages from the financial sector to real economic activity in the Bureau for Economic Research’s (BER) core traditional semi-structural quarterly macroeconometric model. While many central banks have developed DSGE-type models, many national treasuries and other institutions use models similar to the BER’s core model. There is a large body of available literature on incorporating the financial sector into DSGE-type models, but this literature is rather limited for more traditional forecasting models. An additional objective was to add to this body of literature in documenting the changes to the BER’s model. Apart from incorporating the BER’s finance-neutral measure of potential output (see Kemp, 2015), credit markets and assets prices are now model determined. Also, banking sector variables such as the capital adequacy and liquidity ratios as well as the EY Financial Services (as surveyed by the BER) indicators on the credit standards of retail banks influence lending rate spreads faced by households and firms. The aim was to broaden the monetary transmission mechanism in the model so that the financial sector has an explicit impact on real variables in addition to the usual interest rate and exchange rate channels. This is illustrated by comparing the results of a similar sized interest rate shock before and after the model enhancements.
JEL Classification:E10, E17, E20, E27, E44
Keywords:Macroeconometric model, banking sector, capital adequacy ratio, liquidity ratio, credit standards
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Prof Euan Phimister: Stellenbosch Business School
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Topic: "Allocative Efficiency, Labour Shares, and Corporate Lobbying in European Manufacturing"
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BER Weekly
26 Sep 2025 Free Weekly Review | Number 37 | 26 SeptemberThis report covers the key domestic and international data releases over the past week. The more comprehensive BER Weekly Review (Enhanced Version) includes a detailed discussion on the main economic events and developments over the past week, a summary of upcoming data (the week ahead) and the BER’s forecast for key economic indicators....
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