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Turning It Up To Eleven: Re-Evaluating the Role of Financial Frictions in the 2007–2008 Economic Crisis

Author

Listed:
  • Aligishiev, Z.
  • Ben-Gad, M.
  • Mountford, A.
  • Pearlman, J.

Abstract

We analyze the role of public and private financial frictions in the 2007–2008 economic crisis in the United States by extending the model of Drautzburg and Uhlig (2015) to eleven observable variables using data on all three interest rates in the model (policy, private and public). We also include a preference shock in the model, and present an alternative method for describing shock decompositions during and preceding the crisis designed to isolate the impact of the pre-crisis shocks. The estimated model produces an intuitive description of the evolution of the postwar U.S. economy overall and of the economic crisis at the end of the sample period. We find, in contrast to Drautzburg and Uhlig, that monetary and fiscal policy shocks played a significant role in mitigating the effects of the financial crisis.

Suggested Citation

  • Aligishiev, Z. & Ben-Gad, M. & Mountford, A. & Pearlman, J., 2019. "Turning It Up To Eleven: Re-Evaluating the Role of Financial Frictions in the 2007–2008 Economic Crisis," Working Papers 19/08, Department of Economics, City University London.
    • Handle: RePEc:cty:dpaper:19/08
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    File URL: https://openaccess.city.ac.uk/id/eprint/22244/1/Dept_Econ_WP1908.pdf
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    References listed on IDEAS

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    1. 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.
    2. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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    More about this item

    Keywords

    DSGE model; Shock decomposition; Financial Frictions; Fiscal Policy;
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