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Bayesian Evaluation of DSGE Models with Financial Frictions

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  • MICHAŁ BRZOZA‐BRZEZINA
  • MARCIN KOLASA

Abstract

We evaluate two most popular approaches to implementing financial frictions into DSGE models: the Bernanke et al. (1999) setup, where frictions affect the price of loans, and the Kiyotaki and Moore (1997) model, where they concern the quantity of loans. We take both models to the data and check how well they fit it on several margins. Overall, comparing the models favors the Bernanke et al. framework. However, even this model does not make a clear improvement over the New Keynesian benchmark in terms of marginal likelihood and similarity of impulse responses to those obtained from a VAR. These findings point at the need for further research to develop macrofinancial models that would better describe the business cycle dynamics.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 45 (2013)
Issue (Month): 8 (December)
Pages: 1451-1476

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:8:p:1451-1476

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 1-11.

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