Working paper: Banking panic risk and macroeconomic uncertainty

Working paper - January 2020 - No. 149

Authors Mikkelsen, Jakob Guldbæk; Pöschl, Johannes
Subject Financial stability; Macroprudential policy
Type Working paper
Year 2020
Published 8 January 2020
We show that systemic risk in the banking sector breeds macroeconomic uncertainty. We develop a model of a production economy with a banking sector where financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility and increases risk premia on asset prices. A countercyclical capital buffer lowers both the probability of banking panics and aggregate uncertainty.