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The implications of dynamic financial frictions for DSGE models

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  • Uluc Aysun

    () (University of Central Florida, Orlando, FL)

Abstract

This paper shows that when financial frictions are modeled dynamically, broader inferences can be drawn from DSGE models. By embedding a partial equilibrium framework of bankruptcy proceedings in a dynamic New Keynesian model I find, for example, that financial liberalization episodes are only effective when the judicial system is efficient. More generally, I find that the model responses to various shocks depend on the duration of bankruptcy and the costs incurred during the bankruptcy process. State-level data supports one prediction of the model; U.S. monetary policy is most effective in states with longer foreclosure proceedings.

Suggested Citation

  • Uluc Aysun, 2011. "The implications of dynamic financial frictions for DSGE models," Working Papers 2011-02, University of Central Florida, Department of Economics.
  • Handle: RePEc:cfl:wpaper:2011-02
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreclosure; DSGE; financial frictions; court efficiency;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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