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The anatomy of standard DSGE models with financial frictions

In this paper we compare two standard extensions to the New Keynesian model featuring financial frictions. The first model, originating from Kiyotaki and Moore (1997), is based on collateral constraints. The second, developed by Carlstrom and Fuerst (1997) and Bernanke et al. (1999), accentuates the role of external finance premia. Our goal is to compare the workings of the two setups. Towards this end, we tweak the models and calibrate them in a way that allows for both qualitative and quantitative comparisons. Next, we make a thorough analysis of the two frameworks using moment matching, impulse response analysis and business cycle accounting. Overall, we find that the business cycle properties of the external finance premium framework are more in line with empirical evidence. In particular, the collateral constraint model fails to generate hump-shaped impulse responses and, for some important variables, shows moments that are inconsistent with the data by a large margin.

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Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 80.

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Length: 41
Date of creation: 2011
Date of revision:
Handle: RePEc:nbp:nbpmis:80
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  1. Jermann, Urban & Quadrini, Vincenzo, 2009. "Macroeconomic Effects of Financial Shocks," CEPR Discussion Papers 7451, C.E.P.R. Discussion Papers.
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  17. Brzoza-Brzezina, Michal & Makarski, Krzysztof, 2009. "Credit Crunch in a Small Open Economy," MPRA Paper 18595, University Library of Munich, Germany.
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  19. Sustek, Roman, 2009. "Monetary Business Cycle Accounting," MPRA Paper 17518, University Library of Munich, Germany.
  20. Randall Wright & Lixin Huang & Ping He, 2008. "Money, Banking, and Monetary Policy," 2008 Meeting Papers 347, Society for Economic Dynamics.
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  30. repec:dgr:kubcen:2010108s is not listed on IDEAS
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