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Bayesian evaluation of DSGE models with financial frictions

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We evaluate two most popular approaches to implementing financial frictions into DSGE models: the Bernanke et al. (1999) setup, where financial frictions enter through the price of loans, and the Kiyotaki and Moore (1997) model, where they concern the quantity of loans. We take both models to the US data and check how well they fit it on several margins. Overall, comparing the models favors the framework of Bernanke et al. (1999). However, even this model is not able to make a clear improvement over the benchmark New Keynesian model, and the Kiyotaki and Moore (1997) underperforms it on several margins. Furthermore, none of the extensions explains the 2007-09 recession as significantly more “financial” than several previous ones.

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Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 109.

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Length: 43
Date of creation: 2012
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Handle: RePEc:nbp:nbpmis:109

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Keywords: financial frictions; DSGE models; DSGE-VAR; Bayesian analysis;

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