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Financial intermediaries in an estimated DSGE model for the United Kingdom

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  • Villa, Stefania

    ()
    (Birkbeck College, University of London)

  • Yang, Jing

    ()
    (Bank for International Settlements)

Abstract

Gertler and Karadi combined financial intermediation and credit policy in a DSGE framework. We estimate their model with UK data using Bayesian techniques. To validate the fit, we evaluate the model’s empirical properties. Then we analyse the transmission mechanism of the shocks, set to produce a downturn. Finally, we examine the empirical importance of nominal, real and financial frictions and of different shocks. We find that banking friction seems to play an important role in explaining the UK business cycle. Moreover, the banking sector shock seems to explain about half of the fall in real GDP in the recent crisis. A credit supply shock seems to account for most of the weakness in bank lending.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 431.

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Length: 32 pages
Date of creation: 13 Jul 2011
Date of revision:
Handle: RePEc:boe:boeewp:0431

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Keywords: Financial friction; DSGE; Bayesian estimation;

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References

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  1. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  2. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 215-232.
  3. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, 09.
  4. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  6. Chadha, J.S. & Corrado, L. & Sun, Q., 2008. "Money, Prices and Liquidity Effects: Separating Demand from Supply," Cambridge Working Papers in Economics 0855, Faculty of Economics, University of Cambridge.
  7. Yunus Aksoy & Henrique S. Basso & Javier Coto-Martinez, 2013. "Lending Relationships And Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 368-393, 01.
  8. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
  9. David Aikman & Matthias Paustian, 2006. "Bank capital, asset prices and monetary policy," Bank of England working papers 305, Bank of England.
  10. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers 08-36, Bank of Canada.
  11. Bean, Charles & Larsen, Jens D. J. & Nikolov, Kalin, 2002. "Financial frictions and the monetary transmission mechanism: theory, evidence and policy implications," Working Paper Series 0113, European Central Bank.
  12. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  13. Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
  14. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
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Cited by:
  1. Hackworth, Christopher & Radia, Amar & Roberts, Nyssa, 2013. "Understanding the MPC’s forecast performance since mid-2010," Bank of England Quarterly Bulletin, Bank of England, vol. 53(4), pages 336-350.
  2. Giovanni MELINA & Stefania VILLA, 2012. "Fiscal policy and lending relationships," Center for Economic Studies - Discussion papers ces12.06, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. Javier García-Cicco & Markus Kirchner & Santiago Justel, 2014. "Financial Frictions and the Transmission of Foreign Shocks in Chile," Working Papers Central Bank of Chile 722, Central Bank of Chile.
  4. Villa, Stefania, 2013. "Financial frictions in the euro area: a Bayesian assessment," Working Paper Series 1521, European Central Bank.
  5. Tony Hall & Jan Jacobs & Adrian Pagan, . "Macro-Econometric System Modelling @75," NCER Working Paper Series 95, National Centre for Econometric Research.
  6. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
  7. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.

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