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Bayesian Evaluation of DSGE Models with Financial Frictions

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  • MICHA≈Å BRZOZA-BRZEZINA
  • MARCIN KOLASA

Abstract

We evaluate two most popular approaches to implementing financial frictions into DSGE models: the Bernanke, Gertler, and Gilchrist () setup, where frictions affect the price of loans, and the Kiyotaki and Moore () model, where they concern the quantity of loans. We take both models to the data and check how well they fit it on several margins. Overall, comparing the models favors the Bernanke, Gertler, and Gilchrist framework. However, even this model does not make a clear improvement over the New Keynesian benchmark in terms of marginal likelihood and similarity of impulse responses to those obtained from a VAR.
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  • Micha≈Å Brzoza-Brzezina & Marcin Kolasa, 2013. "Bayesian Evaluation of DSGE Models with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(8), pages 1451-1476, December.
  • Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:8:p:1451-1476
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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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