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Estimating Contract Indexation in a Financial Accelerator Model

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Author Info

  • Charles T. Carlstrom
  • Last: T. Carlstrom

    ()
    (Federal Reserve Bank of Cleveland)

  • Timothy S. Fuerst
  • Last: S. Fuerst

    ()
    (University of Notre Dame
    Federal Reserve Bank of Cleveland)

  • Alberto Ortiz
  • Last: Ortiz

    ()
    (Centro de Estudios Monetarios Latinoamericanos
    EGADE Business School)

  • Matthias Paustian
  • Last: Paustian

    ()
    (Bank of England)

Abstract

This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principle conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.

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File URL: http://www.cemla.org/PDF/investigacion/inv-2013-06-10.pdf
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Bibliographic Info

Paper provided by Centro de Estudios Monetarios Latinoamericanos, CEMLA in its series Documentos de Investigación - Research Papers with number 10.

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Length: 42
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:cml:docinv:10

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Keywords: Agency costs; financial accelerator; business cycles.;

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References

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  1. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Working Paper Series WP-08-12, Federal Reserve Bank of Chicago.
  2. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  4. Ferre De Graeve, 2006. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Computing in Economics and Finance 2006 84, Society for Computational Economics.
  5. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2009. "Investment shocks and the relative price of investment," Staff Reports 411, Federal Reserve Bank of New York.
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Cited by:
  1. Merola, Rossana, 2014. "The role of financial frictions during the crisis: an estimated DSGE model," Dynare Working Papers 33, CEPREMAP.
  2. Andrew Lee Smith, 2013. "House Prices, Heterogeneous Banks and Unconventional Monetary Policy Options," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201311, University of Kansas, Department of Economics.
  3. Rossana Merola, 2013. "The role of financial frictions in the 2007-2008 crisis: an estimated DSGE model," Working Papers Department of Economics 2013/08, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.

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