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Financial Frictions and Shocks in an Estimated Small Open Economy DSGE Model

Author

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  • Gan-Ochir Doojav

    (Bank of Mongolia Baga Toiruu 3)

  • Kaliappa Kalirajan

    (The Australian National University)

Abstract

This paper examines the importance of financial frictions and shocks for macroeconomic fluctuations using an estimated small open economy DSGE model. In doing so, a small open economy DSGE model with unemployment, financial frictions and financial shocks is developed. To quantify effects, the model is estimated using Bayesian methods on Australian and the United States (US) data. The main results are (i) the presence of financial accelerator improves the model fit, and (ii) financial shocks (i.e., credit supply and financial wealth shocks) are important for explaining investment and output fluctuations, (iii) including financial data in the analysis changes the model dynamics and influences the significance of the financial and marginal efficiency of investment (MEI) shocks, and (iv) financial shocks play an important role in generating business cycle fluctuations in both Australia and the US.

Suggested Citation

  • Gan-Ochir Doojav & Kaliappa Kalirajan, 2020. "Financial Frictions and Shocks in an Estimated Small Open Economy DSGE Model," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(2), pages 253-291, June.
    • Handle: RePEc:spr:jqecon:v:18:y:2020:i:2:d:10.1007_s40953-019-00179-7
    DOI: 10.1007/s40953-019-00179-7
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    2. Mariia A. Elkina, 2021. "Financial Repression And Transmission Of Macroeconomic Shocks In A DSGE Model With Financial Frictions," HSE Working papers WP BRP 246/EC/2021, National Research University Higher School of Economics.

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    More about this item

    Keywords

    Financial frictions; Financial shocks; Open economy macroeconomics; New Keynesian DSGE model; Bayesian analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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