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How Important are Financial Frictions in the United States and the Euro Area?

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  • Virginia Queijo von Heideken

Abstract

This paper aims to evaluate whether frictions in credit markets are important for business cycles in the United States and the euro area. I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) by adding such frictions as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When estimating the model using Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favor the model with financial frictions, both in the United States and the euro area. Moreover, financial frictions are larger in the euro area.

Suggested Citation

  • Virginia Queijo von Heideken, 2009. "How Important are Financial Frictions in the United States and the Euro Area?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 567-596, September.
  • Handle: RePEc:bla:scandj:v:111:y:2009:i:3:p:567-596
    DOI: 10.1111/j.1467-9442.2009.01577.x
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