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

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  • Gelain, Paolo

Abstract

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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  • Gelain, Paolo, 2010. "The external finance premium in the Euro area: A dynamic stochastic general equilibrium analysis," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 49-71, March.
  • Handle: RePEc:eee:ecofin:v:21:y:2010:i:1:p:49-71
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    8. Wieland, Volker & Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge, 2017. "Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions," CEPR Discussion Papers 12013, C.E.P.R. Discussion Papers.
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    11. Wieland, V. & Afanasyeva, E. & Kuete, M. & Yoo, J., 2016. "New Methods for Macro-Financial Model Comparison and Policy Analysis," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1241-1319, Elsevier.
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    14. Schmidt, Sebastian & Wieland, Volker, 2013. "The New Keynesian Approach to Dynamic General Equilibrium Modeling: Models, Methods and Macroeconomic Policy Evaluation," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 1439-1512, Elsevier.
    15. Matthieu Darracq Paries & Georg Muller & Niki Papadopoulou, 2022. "Fiscal Multipliers with Sovereign Risk and Fragile Banks," Working Papers 2022-5, Central Bank of Cyprus.
    16. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 523-541.
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    18. Angela Capolongo & Daniel Gros, 2020. "The ECB is running out of policy space: can fiscal policy help?," Economics and Business Letters, Oviedo University Press, vol. 9(3), pages 216-220.
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    20. Foroni, Claudia & Gelain, Paolo & Marcellino, Massimiliano, 2022. "The financial accelerator mechanism: does frequency matter?," Working Paper Series 2637, European Central Bank.
    21. Lyu, Juyi & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2023. "UK monetary policy in an estimated DSGE model with financial frictions," Journal of International Money and Finance, Elsevier, vol. 130(C).
    22. Raymond Hawkins & Jeffrey Speakes & Dan Hamilton, 2015. "Monetary policy and PID control," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(1), pages 183-197, April.
    23. Batabyal, Amitrajeet A., 2012. "Project financing, entrepreneurial activity, and investment in the presence of asymmetric information," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 115-122.
    24. Wan, Junmin, 2018. "Prevention and landing of bubble," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 190-204.
    25. Smets, Frank & Villa, Stefania, 2016. "Slow recoveries: Any role for corporate leverage?," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 54-85.

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