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Financial frictions and the real economy

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  • Pietrunti, Mario

Abstract

This paper investigates in a non-linear setting the impact on the real economy of frictions stemming from the financial sector. We develop a medium scale DSGE model with a banking sector where an occasionally binding constraint on banks’ capital induces a relevant non-linearity. The model - estimated on Italian data from 1999 to 2015 via a likelihood-free method - is able to generate business cycle asymmetries as in actual data that cannot replicated by linear models. Lastly, the role of macroprudential policies in smoothing the cycle is discussed JEL Classification: C15, E32, E44, G01

Suggested Citation

  • Pietrunti, Mario, 2017. "Financial frictions and the real economy," ESRB Working Paper Series 41, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201741
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrbwp41.en.pdf
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    References listed on IDEAS

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    1. Bluwstein, Kristina, 2017. "Asymmetric Macro-Financial Spillovers," Working Paper Series 337, Sveriges Riksbank (Central Bank of Sweden).
    2. Niehof, Britta & Hayo, Bernd, 2014. "Analysis of Monetary Policy Responses after Financial Market Crises in a Continuous Time New Keynesian Model," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100410, Verein für Socialpolitik / German Economic Association.
    3. Laurent Clerc & Alexis Derviz & Caterina Mendicino & Stephane Moyen & Kalin Nikolov & Livio Stracca & Javier Suarez & Alexandros P. Vardoulakis, 2015. "Capital Regulation in a Macroeconomic Model with Three Layers of Default," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 9-63, June.
    4. Stijn Claessens, 2015. "An Overview of Macroprudential Policy Tools," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 397-422, December.
    5. Vasco Curdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
    6. Svensson, Lars E.O., 2017. "Cost-benefit analysis of leaning against the wind," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 193-213.
    7. Ozge Akinci & Albert Queraltó, 2014. "Banks, Capital Flows and Financial Crises," International Finance Discussion Papers 1121, Board of Governors of the Federal Reserve System (U.S.), revised 07 Nov 2014.
    8. Luigi Bocola, 2016. "The Pass-Through of Sovereign Risk," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 879-926.
    9. Valerio Scalone, 2015. "Estimating Non-Linear DSGEs with the Approximate Bayesian Computation: an application to the Zero Lower Bound," Working Papers 6/15, Sapienza University of Rome, DISS.
    10. Li, Shuyun May & Dressler, Scott, 2011. "Business cycle asymmetry via occasionally binding international borrowing constraints," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 33-41, March.
    11. C. Cahn & J. Matheron & J-G. Sahuc, 2014. "Assessing the macroeconomic effects of LTROS," Working papers 528, Banque de France.
    12. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    13. Lars E. O. Svensson, 2016. "Cost-Benefit Analysis of Leaning Against the Wind; Are Costs Larger Also with Less Effective Macroprudential Policy?," IMF Working Papers 16/3, International Monetary Fund.
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    Cited by:

    1. Eric Jondeau & Jean-Guillaume Sahuc, 2018. "A General Equilibrium Appraisal of Capital Shortfall," Swiss Finance Institute Research Paper Series 18-12, Swiss Finance Institute, revised Feb 2018.

    More about this item

    Keywords

    financial frictions; likelihood-free estimation; non-linear DSGE Models;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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