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

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  • F. DEGRAEVE

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Abstract

The central variable of theories of financial frictions -the external finance premium- is unobservable. This paper distils the external .finance premium from a DSGE model estimated on US macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate -based solely on non-.financial macroeconomic data- picks up over 70% of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in .fitting key macroeconomic aggregates by including .financial frictions in the model and documents how shock transmission is affected.

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File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_07_482.pdf
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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 07/482.

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Length: 47 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:rug:rugwps:07/482

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Keywords: external finance premium; financial frictions; DSGE; Bayesian estimation;

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