can be seen from this figure, the inverse ratio is observed to be countercyclical, and the contributions of the shocks to the fluctuations are explained. Both financial shocks in the banking and the corporate sectors with conflicting directions, i.e., a negative banking balance sheet shock and a positive corporate balance sheet shock, contributed to an increase in the ratio at almost the same proportion in the recession. Soon after that, an increase in bank equity by conducting TARP made its balance sheet improve, while the negative firm net-worth shock made the firm balance sheet much worse, leading to a sharp reduction of loans by the bank. Both of these things brought the ratio down, since the numerator of the ratio consists of both the loan and the equity in the banks, and the denominator is only its equity. These findings were observed in every case. However, the dynamics of the countercyclical inverse ratio were not generated from Gertler and Kiyotaki (2011). Recently, Adrian et al. (2012) tried to explain why the inverse ratio was countercyclical, following two conflicting movements of banking loans and bond financing of firms, i.e., loan declines and bond increases in the recession. Our findings about both conflicting financial shocks in the recession are consistent with Adrian et al.'s (2012) findings.

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### 6.4 Observations and Interpretation

Overall, we can make three important observations based on our empirical results. First, as for the timing of the financial shocks during the period of the Great Recession shown in Figures 1 and 2, we observed that the bank's net-worth shock occurred earlier than the corporate net-worth shock. Putting it differently, these two financial shocks did not occur concurrently, but the corporate net-worth shock occurred shortly after the bank's net-worth shock. This timing pattern (not concurrent, but proximate timing) may point to the possibility of an endogenous relationship between the balance sheet conditions of the banking sector and the corporate sector. For instance, in reality, it is possible for the corporate sector to hold the financial sector's equity as an asset, and the devaluation of the financial sector's asset may affect the balance sheet condition of the corporate sector. Unfortunately, however, the model in this paper does not allow the corporate sector to hold the banking sector's equity as an asset and further assumes the two financial shocks to be independent from each other. In this paper, the corporate sector is assumed to hold the asset fully in the form of physical capital. $ ^{19} $ Thus, it is inappropriate to interpret the endogenous relationship between the two financial shocks in the context of the model assumed in this paper. Yet, the timing of the two financial shocks during the Great Recession is worth noting.

Second, through the historical decomposition results shown in Figure 4 through Figure 7, we observed the corporate net worth shock during the Great Recession to be relatively weak in Cases A and C compared to those in Cases B and D. This result may point to the possibility of an underestimation of the importance of the corporate net worth shock when the model is estimated by a plain Bayesian estimation method – i.e., without the data-rich estimation. Moreover, an accurate estimation of the corporate net-worth shock during the Great Recession is crucially important in accounting for the economic recovery of the U.S. economy in recent years. For instance, in Cases A and C, a slow recovery of output is mainly accounted for by the negative productivity shock, while in Cases B and D, it is mainly accounted for by a prolonged negative corporate net-worth shock. The slow recovery of the U.S. economy after the Great Recession remains an important puzzle, and a persuasive explanation of this puzzle calls for an accurate estimation of the structural shocks. For an accurate estimation of the structural shocks (especially for the corporate net