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Estimating Contract Indexation in a Financial Accelerator Model

  • Charles T. Carlstrom


    (Federal Reserve Bank of Cleveland)

  • Timothy S. Fuerst


    (University of Notre Dame
    Federal Reserve Bank of Cleveland)

  • Alberto Ortiz


    (Centro de Estudios Monetarios Latinoamericanos
    EGADE Business School)

  • Matthias Paustian


    (Bank of England)

This paper addresses the positive implications of indexing risky debt to observable aggregate conditions. These issues are pursued within the context of the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The principle conclusions include: (1) the estimated level of indexation is significant, (2) the business cycle properties of the model are significantly affected by this degree of indexation, (3) the importance of investment shocks in the business cycle depends upon the estimated level of indexation, and (4) although the data prefers the financial model with indexation over the frictionless model, they have remarkably similar business cycle properties for non-financial exogenous shocks.

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Paper provided by Centro de Estudios Monetarios Latinoamericanos, CEMLA in its series Documentos de Investigación - Research Papers with number 10.

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Length: 42
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:cml:docinv:10
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  1. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  2. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  3. Carlstrom, Charles T. & Fuerst, Timothy S. & Paustian, Matthias, 2013. "Privately optimal contracts and suboptimal outcomes in a model of agency costs," Working Paper 1239, Federal Reserve Bank of Cleveland, revised 01 Oct 2013.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  5. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
  6. Samad Sarferaz & Francesco Furlanetto & Francesco Furlanetto, 2014. "Identification of Financial Factors in Economic Fluctuations," KOF Working papers 14-364, KOF Swiss Economic Institute, ETH Zurich.
  7. Robert J. Shiller & Allan N. Weiss, 1994. "Home Equity Insurance," NBER Working Papers 4830, National Bureau of Economic Research, Inc.
  8. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  9. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Working Paper Series WP-08-12, Federal Reserve Bank of Chicago.
  10. Ferre De Graeve, 2008. "The external finance premium and the macroeconomy: US post-WWII evidence," Working Papers 0809, Federal Reserve Bank of Dallas.
  11. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  12. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
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