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Can Financial Frictions Help Explain The Performance Of The Us Fed?

  • Beatriz de-Blas-Pérez

    ()

This paper analyzes the contribution of additional factors, apart from monetary policy, to the stabilization of the economy observed in the US since the 1980s. I estimate a limited participation model with financial frictions, allowing for changes in the interest rate rule, financial frictions, and shock processes. The results confirm the well-known differences in the interest rate rules between subsamples. However, when monitoring costs are considered, these differences are much smaller. A comparison of fit across several specifications finds that a decrease in financial frictions was more important than changed monetary policy or changed shock processes in stabilizing the economy. These results highlight the important differences in the effects of shocks and policies between limited participation and sticky price models.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we044517.

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Date of creation: Oct 2004
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Handle: RePEc:cte:werepe:we044517
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  15. Boyan Jovanovic, 2004. "Asymmetric Cycles," NBER Working Papers 10573, National Bureau of Economic Research, Inc.
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  20. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
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