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

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Ferre De Graeve (Ghent University)

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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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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 84.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:84

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Keywords: financial accelerator external finance premium DSGE model Bayesian estimation

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Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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