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Introducing Financial Frictions and Unemployment into a Small Open Economy Model

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  • Mathias Trabandt

    (Sveriges Riksbank)

  • Karl Walentin

    (Sveriges Riksbank)

  • Lawrence J. Christiano

    (Northwestern University)

Abstract

How important are financial and labor market frictions for the business cycle dynamics of a small open economy? What are the quantitative effects of increased financial risk on output and inflation? How important are variations in the intensive vs. the extensive margin of labor supply? What are the spillover effects of financial market disturbances to unemployment and vice versa? In order to address these question we extend the small open economy model presented in Adolfson, Laséen, Lindé and Villani (2005, 2007a, 2007b) in two important dimensions. First, we incorporate financial frictions in the accumulation and management of capital similar to Bernanke, Gertler and Gilchrist (1999) and Christiano, Motto and Rostagno (2003, 2007). Second, we include the search and matching framework of Mortensen and Pissarides (1994), Gertler, Sala and Trigari (2006) and Christiano, Ilut, Motto, and Rostagno (2007) into a small open economy model. We estimate the full model using Bayesian techniques.

Suggested Citation

  • Mathias Trabandt & Karl Walentin & Lawrence J. Christiano, 2008. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," 2008 Meeting Papers 423, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:423
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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F00 - International Economics - - General - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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