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A bayesian estimation of a DSGE model with financial frictions

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Episodes of crises that have recently plagued many emerging market economies have lead to a wide-spread questioning of the two traditional generations of models of currency crises. Distressed banking system and adverse credit-markets conditions have been pointed as sources of serious macroeconomics contractions, so introducing these imperfections into standard economic models can help to explain the more recent crises. This paper introduces financial frictions à la Bernanke Gertler and Gilchrist in a two-sector small open economy, suited to analyze an emerging country. The model is estimated on simulated data applying both Bayesian techniques and maximum likelihood method and comparing the results under the two di¤erent estimation procedures. First, I analyze the influence of the prior on the estimation outcomes. Results seems to confirm that one of the main advantages of Bayesian approach is the ability of providing a framework for evaluating fundamentally mis-specified models. Second, I test the sensitivity of estimation outcomes to the sample size, showing how, for large samples, results under Bayesian estimation converges asymptotically to those obtained applying maximum likelihood. A further extension would be to perform the estimation on historical data for an emerging economy that have recently experienced a financial crisis.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 149.

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Length: 55 pages
Date of creation: 01 Oct 2009
Date of revision: 01 Oct 2009
Handle: RePEc:rtv:ceisrp:149

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Keywords: DSGE models; Bayesian estimation; financial accelerator;

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  1. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
  2. Christiano, Lawrence J. & Gust, Christopher & Roldos, Jorge, 2004. "Monetary policy in a financial crisis," Journal of Economic Theory, Elsevier, vol. 119(1), pages 64-103, November.
  3. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Raf, 2005. "On the fit and forecasting performance of New-Keynesian models," Working Paper Series 0491, European Central Bank.
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  9. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  10. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  11. Ali Dib & Ian Christensen, 2005. "Monetary Policy in an Estimated DSGE Model with a Financial Accelerator," Computing in Economics and Finance 2005 314, Society for Computational Economics.
  12. Simon Gilchrist & Jean-Olivier Hairault & Hubert Kempf, 2002. "Monetary policy and the financial accelerator in a monetary union," International Finance Discussion Papers 750, Board of Governors of the Federal Reserve System (U.S.).
  13. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  14. Sargent, Thomas J, 1989. "Two Models of Measurements and the Investment Accelerator," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 251-87, April.
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