Financial Accelerator Mechanism: Evidence for Colombia
Colombia experienced a deep recession in 1999-2003. Growth slowed by 4.2%,and investment by 34.6%. Was the severity of the recession due to a ¯nan-cial accelerator mechanism µa la Bernanke, Gertler, and Gilchrist (1999)? Toanswer this question, this paper estimates a dynamic stochastic general equilib-rium model with credit-market imperfections for the Colombian economy usingBayesian methods. The results show that balance-sheet e®ects played an im-portant role in explaining recent Colombian recession; the ¯nancial acceleratormechanism turns out to be quantitatively signi¯cant accounting for about 50percent of the total reduction in output after a monetary policy tightening.
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