U.S. business cycles, monetary policy and the external finance premium
I investigate a model of the U.S. economy with nominal rigidities and a financial accelerator mechanism à la Bernanke et al. (1999). I calculate total factor productivity and monetary policy deviations for the U.S. and quantitatively explore the ability of the model to account for the cyclical patterns of GDP (excluding government), investment, consumption, the share of hours worked, inflation and the quarterly interest rate spread between the Baa corporate bond yield and the 20-year Treasury bill rate during the Great Moderation. I show that the magnitude and cyclicality of the external finance premium depend nonlinearly on the degree of price stickiness (or lack thereof) in the Bernanke et al. (1999) model and on the specification of both the target Taylor (1993) rate for policy and the exogenous monetary shock process.> ; The strong countercyclicality of the external finance premium induces substitution away from consumption and into investment in periods where output grows above its long-run trend as the premium tends to fall below its steady state and financing investment becomes temporarily cheaper. The less frequently prices change in this environment, the more accentuated the fluctuations of the external finance premium are and the more dominant they become on the dynamics of investment, hours worked and output. However, these features—the countercyclicality and large volatility of the spread—are counterfactual and appear to be a key impediment limiting the ability of the model to account for the U.S. data over the Great Moderation period.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.dallasfed.org/|
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tommaso Monacelli & Ester Faia, 2005.
"Optimal Interest Rate Rules, Asset Prices and Credit Frictions,"
Computing in Economics and Finance 2005
452, Society for Computational Economics.
- Faia, Ester & Monacelli, Tommaso, 2007. "Optimal interest rate rules, asset prices, and credit frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3228-3254, October.
- Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003.
"The Great Depression and the Friedman-Schwartz hypothesis,"
Federal Reserve Bank of Cleveland, pages 1119-1215.
- Lawrence J. Christiano & Roberto Motto, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," Computing in Economics and Finance 2004 169, Society for Computational Economics.
- Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," NBER Working Papers 10255, National Bureau of Economic Research, Inc.
- Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper Series 0326, European Central Bank.
- Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper 0318, Federal Reserve Bank of Cleveland.
- Kiyotaki, Nobuhiro & Moore, John, 1997.
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 211-48, April.
- John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
- Ryo Kato, 2003. "Matlab code for Kiyotaki-Moore credit cycles," QM&RBC Codes 113, Quantitative Macroeconomics & Real Business Cycles.
- Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
- Susanto Basu, 1996.
"Procyclical Productivity: Increasing Returns or Cyclical Utilization?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 111(3), pages 719-751.
- Susanto Basu, 1995. "Procyclical Productivity: Increasing Returns or Cyclical Utilization?," NBER Working Papers 5336, National Bureau of Economic Research, Inc.
- Paul Gomme & Peter Rupert, 2005.
"Theory, measurement, and calibration of macroeconomic models,"
0505, Federal Reserve Bank of Cleveland.
- Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
When requesting a correction, please mention this item's handle: RePEc:fip:feddgw:160. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)
If references are entirely missing, you can add them using this form.