Macro-financial linkage, endogenous risk premium and monetary policy: evidence from a semi-structural model estimated for Morocco

Abstract

Purpose This paper seeks to investigate the amplitude of macro-financial linkage for an emerging country like Morocco. Design/methodology/approach For this purpose, it presents a semi-structural new-Keynesian model. In the blocks of the former, a risk premium is charged on the lending rate in addition to the policy rate. To identify the macro-financial linkage, the risk premium is considered endogenous. It is represented as a function of the borrower’s probability of default, which is, in turn, a function of the GDP gap. To identify this two-wave relationship, we estimate an ARDL model between 2009Q1 and 2020Q1. Therefore, we integrate the estimation results into the new-Keynesian semi-structural model. Findings The results reveal a significant impact of the financial condition on the path of the business cycle. In fact, demand shocks and nonperforming loan shocks (NPLs) are exacerbated by the presence of macro-financial linkage. Under this condition, the amplitude and persistence of the shocks are amplified and extended. Originality/value This paper extends the literature on the interconnection between the real and financial economies by considering the endogeneity of the credit risk premium and modeling its dynamics.