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Bayesian Estimation of a DSGE Model with Financial Frictions for the U.S. and the Euro Area

  • Virginia Queijo

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    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 Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 306.

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    Date of creation: 11 Nov 2005
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    Handle: RePEc:sce:scecf5:306
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    1. Andrew T. Levin & Fabio M. Natalucci, 2005. "The Magnitude and Cyclical Behavior of Financial Market Frictions," 2005 Meeting Papers 443, Society for Economic Dynamics.
    2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
    3. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
    4. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
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    6. Mojon, Benoît & Angeloni, Ignazio & Terlizzese, Daniele & Kashyap, Anil K., 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and U.S," Working Paper Series 0268, European Central Bank.
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    16. Kempf, Hubert & Gilchrist, Simon & Hairault, Jean-Olivier, 2002. "Monetary policy and the financial accelerator in a monetary union," Working Paper Series 0175, European Central Bank.
    17. Ester Faia, 2004. "Monetary policy in a world with different financial systems," Money Macro and Finance (MMF) Research Group Conference 2003 28, Money Macro and Finance Research Group.
    18. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
    19. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
    20. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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    22. Meier, André & Müller, Gernot J., 2005. "Fleshing out the monetary transmission mechanism: output composition and the role of financial frictions," Working Paper Series 0500, European Central Bank.
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