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Can Financial Frictions Help Explain The Performance Of The Us Fed?

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Beatriz de-Blas-Pérez ()

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Abstract

This paper analyzes the contribution of additional factors, apart from monetary policy, to the stabilization of the economy observed in the US since the 1980s. I estimate a limited participation model with financial frictions, allowing for changes in the interest rate rule, financial frictions, and shock processes. The results confirm the well-known differences in the interest rate rules between subsamples. However, when monitoring costs are considered, these differences are much smaller. A comparison of fit across several specifications finds that a decrease in financial frictions was more important than changed monetary policy or changed shock processes in stabilizing the economy. These results highlight the important differences in the effects of shocks and policies between limited participation and sticky price models.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we044517.

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Date of creation: Oct 2004
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Handle: RePEc:cte:werepe:we044517

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  4. Beatriz de-Blas-Pérez, 2003. "Performance Of Interest Rate Rules Under Credit Market Imperfections," Economics Working Papers we033813, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
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  16. Collard, Fabrice & Fève, Patrick & Langot, François, 2000. "Structural Inference and the Lucas Critique," IDEI Working Papers 111, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2001. [Downloadable!]
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  17. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
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  20. Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1321-38, November. [Downloadable!] (restricted)
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