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The External Finance Premium and the Macroeconomy: US post-WWII Evidence

  • F. DEGRAEVE

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The central variable of theories of financial frictions -the external finance premium- is unobservable. This paper distils the external .finance premium from a DSGE model estimated on US macroeconomic data. Within the DSGE framework, movements in the premium can be given an interpretation in terms of shocks driving business cycles. A key result is that the estimate -based solely on non-.financial macroeconomic data- picks up over 70% of the dynamics of lower grade corporate bond spreads. The paper also identifies a gain in .fitting key macroeconomic aggregates by including .financial frictions in the model and documents how shock transmission is affected.

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File URL: http://wps-feb.ugent.be/Papers/wp_07_482.pdf
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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 07/482.

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Length: 47 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:rug:rugwps:07/482
Contact details of provider: Postal: Hoveniersberg 4, B-9000 Gent
Phone: ++ 32 (0) 9 264 34 61
Fax: ++ 32 (0) 9 264 35 92
Web page: http://www.ugent.be/eb

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