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The anatomy of standard DSGE models with financial frictions

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  • Brzoza-Brzezina, Michał
  • Kolasa, Marcin
  • Makarski, Krzysztof

Abstract

We compare two standard extensions to the New Keynesian framework that feature financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. We tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we thoroughly analyze the two variants using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to produce hump-shaped impulse responses and generates volatilities of the price of capital and rate of return on capital that are inconsistent with the data by a large margin.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 32-51

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:32-51

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Financial frictions; DSGE models; Business cycle accounting;

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Citations

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Cited by:
  1. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
  2. Frantisek Brazdik & Michal Hlavacek & Ales Marsal, 2011. "Survey of Research on Financial Sector Modeling within DSGE Models: What Central Banks Can Learn from It," Research and Policy Notes 2011/03, Czech National Bank, Research Department.
  3. Hylton Hollander and Guangling Liu, 2013. "The Equity Price Channel in a New-Keynesian DSGE Model with Financial Frictions and Banking," Working Papers 360, Economic Research Southern Africa.
  4. 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.
  5. Haddow, Abigail & Mileva, Mariya, 2013. "Financial factors and the international transmission mechanism," Bank of England working papers 479, Bank of England.
  6. Hirakata, Naohisa & Sudo, Nao & Ueda, Kozo, 2013. "Is the net worth of financial intermediaries more important than that of non-financial firms?," Globalization and Monetary Policy Institute Working Paper 161, Federal Reserve Bank of Dallas.
  7. Mara Pirovano, 2013. "Household and firm leverage, capital flows and monetary policy in a small open economy," Working Paper Research 246, National Bank of Belgium.
  8. Panagiotis Petrakis & Emmanuel Papadakis & Nikoleta Daniilopoulou, 2012. "Public Statements on Sovereign Yield Spreads:The Greek Case," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 6(2), pages 5-16, December.
  9. Fabia A. de Carvalho & Marcos R. Castro & Silvio M. A. Costa, 2013. "Traditional and Matter-of-fact Financial Frictions in a DSGE Model for Brazil: the role of macroprudential instruments and monetary policy," Working Papers Series 336, Central Bank of Brazil, Research Department.
  10. Kolasa, Marcin, 2013. "Business cycles in EU new member states: How and why are they different?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 487-496.

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