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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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    18. 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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