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The implications of dynamic financial frictions for DSGE models

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  • Uluc Aysun

    ()
    (University of Central Florida, Orlando, FL)

Abstract

This paper shows that when financial frictions are modeled dynamically, broader inferences can be drawn from DSGE models. By embedding a partial equilibrium framework of bankruptcy proceedings in a dynamic New Keynesian model I find, for example, that financial liberalization episodes are only effective when the judicial system is efficient. More generally, I find that the model responses to various shocks depend on the duration of bankruptcy and the costs incurred during the bankruptcy process. State-level data supports one prediction of the model; U.S. monetary policy is most effective in states with longer foreclosure proceedings.

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Bibliographic Info

Paper provided by University of Central Florida, Department of Economics in its series Working Papers with number 2011-02.

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Length: 39 Pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:cfl:wpaper:2011-02

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Web page: http://www.bus.ucf.edu/economics/
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Keywords: Foreclosure; DSGE; financial frictions; court efficiency;

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