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How Important are Financial Frictions in the U.S. and the Euro Area?

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Author Info

  • Queijo von Heideken, Virginia

    ()
    (Monetary Policy Department, Central Bank of Sweden)

Abstract

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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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 223.

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Length: 40 pages
Date of creation: 01 May 2008
Date of revision:
Handle: RePEc:hhs:rbnkwp:0223

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Related research

Keywords: Financial frictions; DSGE models; Bayesian estimation;

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Cited by:
  1. Thepthida Sopraseuth & Eleni Iliopulos, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
  2. Ichiro Fukunaga & Masashi Saito, 2009. "Asset Prices and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 27(1), pages 143-170, November.
  3. Alberto Ortiz Bolaños, 2013. "Credit Market Shocks, Monetary Policy, and Economic Fluctuations," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 317-369, July-Dece.
  4. 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.
  5. J. A. Carrillo & C. Poilly, 2012. "How do financial frictions affect the spending multiplier during a liquidity trap?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/779, Ghent University, Faculty of Economics and Business Administration.
  6. Ralf R. Meisenzahl, 2011. "Verifying the state of financing constraints: evidence from U.S. business credit contracts," Finance and Economics Discussion Series 2011-04, Board of Governors of the Federal Reserve System (U.S.).
  7. Merola, Rossana, 2010. "Optimal monetary policy in a small open economy with financial frictions," Discussion Paper Series 1: Economic Studies 2010,01, Deutsche Bundesbank, Research Centre.

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