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The external finance premium and the macroeconomy: US post-WWII evidence

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  • Ferre De Graeve

Abstract

The central variable of theories of financial frictions--the external finance premium--is unobservable. This paper distils the external finance premium from a DSGE model estimated on U.S. macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate--based solely on nonfinancial macroeconomic data--picks up over 70 percent of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in fitting key macroeconomic aggregates by including financial frictions in the model and documents how shock transmission is affected.

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File URL: http://dallasfed.org/assets/documents/research/papers/2008/wp0809.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0809.

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Date of creation: 2008
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Handle: RePEc:fip:feddwp:0809

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Keywords: Financial markets ; Corporate bonds ; Corporations - Finance;

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