This paper aims to evaluate if frictions in credit markets are important for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.
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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number
223.
Find related papers by JEL classification: C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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