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Financial frictions in the euro area: a Bayesian assessment

  • Villa, Stefania

This paper compares from a Bayesian perspective three dynamic stochastic general equilibrium models in order to analyse whether financial frictions are empirically relevant in the Euro Area (EA) and, if so, which type of financial frictions is preferred by the data. The models are: (i) Smets and Wouters (2007) (SW); (ii) a SW model with financial frictions originating in non-financial firms à la Bernanke et al. (1999), (SWBGG); and (iii) a SW model with financial frictions originating in financial intermediaries, à la Gertler and Karadi (2011), (SWGK). The comparison between the three estimated models is made along different dimensions: (i) the Bayes factor; (ii) business cycle moments; and (iii) impulse response functions. The analysis of the Bayes factor and of simulated moments provides evidence in favour of the SWGK model. This paper also finds that the SWGK model outperforms the SWBGG model in forecasting EA inflationary pressures in a Phillips curve specification. JEL Classification: C11, E44

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Paper provided by European Central Bank in its series Working Paper Series with number 1521.

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Date of creation: Mar 2013
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Handle: RePEc:ecb:ecbwps:20131521
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  1. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  2. De Graeve Ferre, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Money Macro and Finance (MMF) Research Group Conference 2006 83, Money Macro and Finance Research Group.
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  4. Nolan, Charles & Thoenissen, Christoph, 2008. "Financial shocks and the US business cycle," SIRE Discussion Papers 2008-58, Scottish Institute for Research in Economics (SIRE).
  5. repec:dgr:uvatin:20100100 is not listed on IDEAS
  6. Raf Wouters & Frank Smets, 2005. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 161-183.
  7. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
  8. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
  9. Günter Coenen & Frank Smets & Igor Vetlov, 2009. "Estimation of the Euro Area Output Gap Using the NAWM," Bank of Lithuania Working Paper Series 5, Bank of Lithuania.
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  14. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  15. Vasco Gabriel & Paul Levine & Joseph Pearlman & Bo Yang, 2010. "An Estimated DSGE Model of the Indian Economy," School of Economics Discussion Papers 1210, School of Economics, University of Surrey.
  16. Giannone, Domenico & Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2010. "Non-standard Monetary Policy Measures and Monetary Developments," CEPR Discussion Papers 8125, C.E.P.R. Discussion Papers.
  17. Cristiano Cantore & Paul Levine & Joseph Pearlman & Bo Yang, 2014. "CES Technology and Business Cycle Fluctuations," School of Economics Discussion Papers 0414, School of Economics, University of Surrey.
  18. Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2010. "Monetary policy in exceptional times," Working Paper Series 1253, European Central Bank.
  19. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  20. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  21. De Fiore, Fiorella & Tristani, Oreste, 2009. "Optimal monetary policy in a model of the credit channel," Working Paper Series 1043, European Central Bank.
  22. Gelain, Paolo, 2010. "The external finance premium in the euro area A useful indicator for monetary policy?," Working Paper Series 1171, European Central Bank.
  23. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  24. Ansgar Rannenberg, 2012. "Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics," Working Paper Research 224, National Bank of Belgium.
  25. Paul Levine & Joseph Pearlman & George Perendia & Bo Yang, 2010. "Endogenous Persistence in an Estimated DSGE Model under Imperfect Information," School of Economics Discussion Papers 0310, School of Economics, University of Surrey.
  26. Mark Gertler & Cara S. Lown, 2000. "The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications," NBER Working Papers 7549, National Bureau of Economic Research, Inc.
  27. Villa, Stefania & Yang, Jing, 2011. "Financial intermediaries in an estimated DSGE model for the United Kingdom," Bank of England working papers 431, Bank of England.
  28. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
  29. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  30. Roger Aliaga‐Díaz & María Pía Olivero, 2010. "Macroeconomic Implications of “Deep Habits” in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1495-1521, December.
  31. Virginia Queijo von Heideken, 2009. "How Important are Financial Frictions in the United States and the Euro Area?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 567-596, 09.
  32. Simon Gilchrist & Egon Zakrajšek, 2011. "Monetary Policy and Credit Supply Shocks," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 195-232, June.
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