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What Does Structural Analysis of the External Finance Premium Say About Financial Frictions?

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  • Jelena Zivanovic

Abstract

I use a structural vector autoregression (SVAR) with sign restrictions to provide conditional evidence on the behavior of the US external finance premium (EFP). The results indicate that the excess bond premium, a proxy for the EFP, reacts countercyclically to supply and monetary policy shocks and procyclically to demand shocks. I confront my empirical evidence with the predictions from financial dynamic stochastic general equilibrium (DSGE) models with respect to the finance premium in order to identify an empirically relevant financial friction. The Bernanke, Gertler and Gilchrist (1999) model generates transmission mechanisms that are favored by the data.

Suggested Citation

  • Jelena Zivanovic, 2019. "What Does Structural Analysis of the External Finance Premium Say About Financial Frictions?," Staff Working Papers 19-38, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-38
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    2. Boehl, Gregor & Strobel, Felix, 2024. "The empirical performance of the financial accelerator since 2008," Journal of Economic Dynamics and Control, Elsevier, vol. 167(C).
    3. Kerem Tuzcuoglu, 2023. "Risk Amplification Macro Model (RAMM)," Technical Reports 123, Bank of Canada.

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    More about this item

    Keywords

    Economic models; Financial markets; Recent economic and financial developments;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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