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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. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2007. "Evaluating An Estimated New Keynesian Small Open Economy Model," Working Paper Series 203, Sveriges Riksbank (Central Bank of Sweden).
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  3. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
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