https://macropaperwarehouse.com/authors/kirstin-hubrich/Kirstin HubrichHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/financial-shocks-and-leverage-of-financial-institutions-when-do-they-matter/https://macropaperwarehouse.com/papers/financial-shocks-and-leverage-of-financial-institutions-when-do-they-matter/<p>This paper investigates the role of leverage of financial institutions in amplifying the transmission of financial shocks to the macroeconomy, with particular attention to whether that amplification differs across economic regimes. The authors develop a new endogenous regime-switching structural vector autoregression (RS-SVAR) model with time-varying transition probabilities, in which the probability of switching regime depends on the contemporaneous state of the economy (endogenous switching). The model extends the Sims and Zha (2006) and Sims, Waggoner, and Zha (2008) Markov-switching SVAR framework by: (1) incorporating a time-varying transition matrix in which the probability of staying in a regime is a logistic function of lagged endogenous variables; and (2) introducing new identification techniques for RS-SVARs, including non-recursive zero restrictions, sign restrictions, and narrative sign restrictions, which can in some cases uniquely identify structural shocks rather than merely set-identify them.</p>