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The external finance premium in the Euro area: A dynamic stochastic general equilibrium analysis

  • Gelain, Paolo

In this paper I estimate a New Keynesian Dynamic Stochastic General Equilibrium model à la (Smets and Wouters, 2003), (Smets and Wouters, 2005) and (Smets and Wouters, 2007) featured with financial frictions à la Bernanke, Gertler, and Gilchrist (1999) for the Euro Area. The main aim is to obtain a time series for the unobserved risk premium of entrepreneurs loans, with the further aim of providing a dynamic analysis of it (IRFs analysis and variance decomposition analysis). Results confirm in general what recently found for the US by De Graeve (2008), namely that the model with financial frictions can generate a series for the premium, without using any financial macroeconomic aggregates, highly correlated with available proxies for the premium (about 65% with the A graded corporate bonds spread). The advantage of using a structural model to obtain the premium lies in the fact that it allows for the dynamic analysis above mentioned, whose main achievement is to highlight that the estimated premium is not necessarily: (1) counter-cyclical (this depends on the shock considered) and (2) pro-cyclical during a recession.

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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 21 (2010)
Issue (Month): 1 (March)
Pages: 49-71

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Handle: RePEc:eee:ecofin:v:21:y:2010:i:1:p:49-71
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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  1. Andrew T. Levin & Fabio M. Natalucci & Egon Zakrajsek, 2004. "The magnitude and cyclical behavior of financial market frictions," Finance and Economics Discussion Series 2004-70, Board of Governors of the Federal Reserve System (U.S.).
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  4. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  5. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
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  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  16. Martha R. López & Norberto Rodríguez N., 2008. "Financial Accelerator Mechanism: Evidence for Colombia," BORRADORES DE ECONOMIA 004509, BANCO DE LA REPÚBLICA.
  17. Frank Smets & Raf Wouters, 2004. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE approach," Working Paper Research 61, National Bank of Belgium.
  18. Alejandro Justiniano & Selim Elekdag & Ivan Tchakarov, 2005. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Working Papers 05/44, International Monetary Fund.
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