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The implications of dynamic financial frictions for DSGE models

  • Uluc Aysun


    (University of Central Florida, Orlando, FL)

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.

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Paper provided by University of Central Florida, Department of Economics in its series Working Papers with number 2011-02.

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Length: 39 Pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:cfl:wpaper:2011-02
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  16. Uluc Aysun & Adam Honig, 2008. "Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops," Working papers 2008-41, University of Connecticut, Department of Economics.
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  18. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
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