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Are two financial frictions necessary to match U.S. business and financial cycles?

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  • Górajski, Mariusz
  • Kuchta, Zbigniew

Abstract

This study performs a Bayesian assessment of a New Keynesian DSGE model that links the costly state-verification financial friction with financial constraints from the costly-enforcement problem. We also analyze three theoretical counterparts that contain either one financial rigidity or any of them. Therefore, we compare four DSGE models with each other and with a set of BVARs for U.S. data. We show that the DSGE model with costly state-verification friction outperforms the other DSGE models and may compete with the BVARs in matching the data. Therefore, two financial rigidities seem unnecessary to correctly match the U.S. business and financial cycles.

Suggested Citation

  • Górajski, Mariusz & Kuchta, Zbigniew, 2024. "Are two financial frictions necessary to match U.S. business and financial cycles?," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323011273
    DOI: 10.1016/j.frl.2023.104755
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