Colombia experienced a deep recession in 1999-2003. Growth slowed by 4.2%, and investment by 34.6%. Was the severity of the recession due to a ¯nan- cial accelerator mechanism µa la Bernanke, Gertler, and Gilchrist (1999)? To answer this question, this paper estimates a dynamic stochastic general equilib- rium model with credit-market imperfections for the Colombian economy using Bayesian methods. The results show that balance-sheet e®ects played an im- portant role in explaining recent Colombian recession; the ¯nancial accelerator mechanism turns out to be quantitatively signi¯cant accounting for about 50 percent of the total reduction in output after a monetary policy tightening.
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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number
004509.
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