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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. Copyright © The editors of the "Scandinavian Journal of Economics" 2009. .

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  • 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
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    References listed on IDEAS

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    11. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
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