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Financial frictions in the Euro Area and the United States: a Bayesian assessment

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  • Stefania Villa

    (KU Leuven
    University of Foggia)

Abstract

This paper assesses the empirical relevance of financial frictions in the Euro Area (EA) and the United States (US). It provides a comprehensive set of comparisons between two models: (i) a Smets and Wouters (2007) (SW) model with financial frictions originating in non-financial firms à la Bernanke et al. (1999) (SWBGG); and (ii) a SW model with frictions originating in financial intermediaries, à la Gertler and Karadi (2011) (SWGK). Proved that the introduction of financial frictions in either way improves the models' fit compared to a standard SW model, the empirical comparisons reveal that the SWGK model outperforms the SWBGG model both in the EA and the US. Two main factors explain this result: first, the magnitude of the financial accelerator effect; and second, the role of the investment-specific technology shock in affecting financial variables.

Suggested Citation

  • Stefania Villa, 2014. "Financial frictions in the Euro Area and the United States: a Bayesian assessment," BCAM Working Papers 1407, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:1407
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    More about this item

    Keywords

    Financial frictions; DSGE models; Bayesian estimation.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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