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

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  • Queijo von Heideken, Virginia

    () (Monetary Policy Department, Central Bank of Sweden)

Abstract

This paper aims to evaluate if frictions in credit markets are important 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) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.

Suggested Citation

  • Queijo von Heideken, Virginia, 2008. "How Important are Financial Frictions in the U.S. and the Euro Area?," Working Paper Series 223, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0223
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    Cited by:

    1. Ichiro Fukunaga & Masashi Saito, 2009. "Asset Prices and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, pages 143-170.
    2. Roland Beck & Sebastian Weber, 2011. "Should Larger Reserve Holdings Be More Diversified?," International Finance, Wiley Blackwell, pages 415-444.
    3. Rossana Merola, 2013. "The role of financial frictions in the 2007-2008 crisis: an estimated DSGE model," Working Papers Department of Economics 2013/08, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    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, pages 1700-1731.
    5. Ichiro Fukunaga & Masashi Saito, 2009. "Asset Prices and Monetary Policy," IMES Discussion Paper Series 09-E-21, Institute for Monetary and Economic Studies, Bank of Japan.
    6. Merola, Rossana, 2010. "Optimal monetary policy in a small open economy with financial frictions," Discussion Paper Series 1: Economic Studies 2010,01, Deutsche Bundesbank, Research Centre.
    7. Ralf R. Meisenzahl, 2011. "Verifying the state of financing constraints: evidence from U.S. business credit contracts," Finance and Economics Discussion Series 2011-04, Board of Governors of the Federal Reserve System (U.S.).
    8. Eleni Iliopulos & Thepthida Sopraseuth, 2012. "L'intermédiation financière dans l'analyse macroéconomique : le défi de la crise," Économie et Statistique, Programme National Persée, vol. 451(1), pages 91-130.
    9. Caterina Mendicino & Yahong Zhang, 2016. "Risk Shocks in a Small Open Economy," Working Papers 1602, University of Windsor, Department of Economics.
    10. Eric T. Swanson, 2009. "Risk aversion, the labor margin, and asset pricing in DSGE models," Working Paper Series 2009-26, Federal Reserve Bank of San Francisco.
    11. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, pages 1770-1805.
    12. Alberto Ortiz Bolaños, 2013. "Credit Market Shocks, Monetary Policy, and Economic Fluctuations," Monetaria, Centro de Estudios Monetarios Latinoamericanos, pages 317-369.
    13. Alberto Ortiz Bolaños, 2013. "Credit Market Shocks, Monetary Policy, and Economic Fluctuations," Monetaria, Centro de Estudios Monetarios Latinoamericanos, pages 317-369.

    More about this item

    Keywords

    Financial frictions; DSGE models; Bayesian estimation;

    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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