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

  • Queijo, Virginia

    ()

    (Institute for International Economic Studies, Stockholm University)

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.

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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 738.

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Length: 51 pages
Date of creation: 01 Aug 2005
Date of revision:
Handle: RePEc:hhs:iiessp:0738
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