BANK CAPITAL AND MACROECONOMIC SHOCKS: A PRINCIPAL COMPONENTS ANALYSIS AND VECTOR ERROR CORRECTION MODEL

Abstract

The recent financial turmoil has clearly highlighted the potential role of financial factors on amplification of macroeconomic developments and stressed the importance of analyzing the relationship between banks’ balance sheets and economic activity. This paper assesses the impact of the bank capital channel in the transmission of schocks in Europe on the basis of bank's balance sheet data. The empirical analysis is carried out through a Principal Component Analysis and in a Vector Error Correction Model

Keywords

• Bank Capital Channel, Shocks Transmission, Principal Component Analysis, Non-stationary panel.

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