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How Important are Financial Frictions in the U.S. and Euro Area?

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  • Queijo, Virginia

    () (Institute for International Economic Studies, Stockholm University)

Abstract

This paper aims to evaluate the importance of frictions in credit markets for business cycles in the U.S. and the Euro area. For this purpose, I modify the DSGE financial accelerator model developed by Bernanke, Gertler and Gilchrist (1999) and estimate it using Bayesian methods. The model is augmented with frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. My results indicate that financial frictions are relevant in both areas. Using the Bayes factor as criterion, the data favors the model with financial frictions both in the U.S. and the Euro area in five different specifications of the model. Moreover, the size of the financial frictions is larger in the Euro area.

Suggested Citation

  • Queijo, Virginia, 2005. "How Important are Financial Frictions in the U.S. and Euro Area?," Seminar Papers 738, Stockholm University, Institute for International Economic Studies.
    • Handle: RePEc:hhs:iiessp:0738
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    References listed on IDEAS

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    1. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 77-114.
    2. Gilchrist, Simon & Hairault, Jean-Olivier & Kempf, Hubert, 2002. "Monetary policy and the financial accelerator in a monetary union," Working Paper Series 175, European Central Bank.
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    5. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
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    Citations

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    Cited by:

    1. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle dating," Working Papers (Old Series) 0612, Federal Reserve Bank of Cleveland.
    2. De Graeve, Ferre, 2008. "The external finance premium and the macroeconomy: US post-WWII evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3415-3440, November.
    3. Andre Kurmann & Nicolas Petrosky-Nadeau, 2006. "Credit Market Frictions with Costly Capital Reallocation as a Propagation Mechanism," 2006 Meeting Papers 365, Society for Economic Dynamics.
    4. Castelnuovo, Efrem & Nisticò, Salvatore, 2010. "Stock market conditions and monetary policy in a DSGE model for the U.S," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1700-1731, September.
    5. Gelain, Paolo, 2010. "The external finance premium in the euro area A useful indicator for monetary policy?," Working Paper Series 1171, European Central Bank.
    6. Lawrence J. Christiano & Joshua M. Davis, 2006. "Two flaws in business cycle accounting," Working Paper Series WP-06-10, Federal Reserve Bank of Chicago.
    7. Yasuo Hirose, 2008. "Equilibrium Indeterminacy and Asset Price Fluctuation in Japan: A Bayesian Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 967-999, August.
    8. Fiorella De Fiore & Oreste Tristani, 2011. "Credit and the Natural Rate of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 407-440, March.

    More about this item

    Keywords

    DSGE models; Bayesian estimation; financial accelerator;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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