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The External Finance Premium and the Macroeconomy: US post-WWII Evidence

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  • De Graeve Ferre

    (Ghent University)

Abstract

This paper embeds the financial accelerator into a medium-scale DSGE model and estimates it using Bayesian methods. Incorporation of financial frictions enhances the model's description of the main macroeconomic aggregates. The financial accelerator accounts for approximately ten percent of monetary policy transmission. The model-consistent premium for external finance compares well to observable proxies of the premium, such as the high-yield spread. Fluctuations in the external finance premium are primarily driven by investment supply and monetary policy shocks. In terms of recession prediction, false signals of the premium can be given an economic interpretation

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File URL: http://repec.org/mmf2006/up.10750.1145517824.pdf
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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 83.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:83

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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Keywords: financial accelerator; external finance premium; DSGE model; Bayesian estimation;

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