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Financial Efficiency and Aggregate Fluctuations: An Exploration

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Changes in the efficiency of the financial system can greatly affect the overall economy. A simple real business cycle framework shows how banks can be a source, rather than just a filter, for output shocks. This paper develops and tests predictions about cointegration between several bank and output series, as well as explores the comovement of output and combined banking variables. Use of the vector error-correcting model provides additional information on the role of banks as both transmission mechanisms and originators of cyclical disturbances.


Suggested citation: Haubrich, Joseph. “Financial Efficiency and Aggregate Fluctuations: An Exploration,” Federal Reserve Bank of Cleveland, Economic Review, vol. 27, no. 4, pp. 25-40, 10.01.1991.

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