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How Important are Financial Frictions in the United States and the Euro Area?

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  • Virginia Queijo von Heideken

Abstract

This paper aims to evaluate whether frictions in credit markets are important for business cycles in the United States and the euro area. I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding such frictions as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When estimating the model using Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favor the model with financial frictions, both in the United States and the euro area. Moreover, financial frictions are larger in the euro area. Copyright � The editors of the "Scandinavian Journal of Economics" 2009. .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 111 (2009)
Issue (Month): 3 (09)
Pages: 567-596

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Handle: RePEc:bla:scandj:v:111:y:2009:i:3:p:567-596

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Michał Brzoza-Brzezina & Marcin Kolasa, 2012. "Bayesian evaluation of DSGE models with financial frictions," National Bank of Poland Working Papers 109, National Bank of Poland, Economic Institute.
  2. Mathias Trabandt & Karl Walentin & Lawrence J. Christiano, 2008. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," 2008 Meeting Papers 423, Society for Economic Dynamics.
  3. David Jacobs & Vanessa Rayner, 2012. "The Role of Credit Supply in the Australian Economy," RBA Research Discussion Papers rdp2012-02, Reserve Bank of Australia.
  4. Ali Dib, 2010. "Banks, Credit Market Frictions, and Business Cycles," Working Papers 10-24, Bank of Canada.
  5. Fernández, Andrés & Gulan, Adam, 2012. "Interest rates and business cycles in emerging economies: The role of financial frictions," Research Discussion Papers 23/2012, Bank of Finland.
  6. Yahong Zhang, 2011. "Financial Frictions, Financial Shocks and Labour Market Fluctuations in Canada," Discussion Papers 11-10, Bank of Canada.
  7. Ali Dib, 2010. "Capital Requirement and Financial Frictions in Banking: Macroeconomic Implications," Working Papers 10-26, Bank of Canada.

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