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Imperfect information about financial frictions and consequences for the business cycle

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  • Hollmayr, Josef
  • Kühl, Michael

Abstract

In this paper, we discuss the consequences of imperfect information about financial frictions on the macroeconomy. We rely on a New Keynesian DSGE model with a banking sector in which we introduce imperfect information about a limited enforcement problem. Bank managers divert resources and can increase the share of diversion. This can only be observed imperfectly by depositors. The ensuing imperfect information generates a higher volatility of the business cycle. Spillovers from the financial sector to the real economy are higher and shocks in general are considerably amplified in the transition period until agents' learning is complete. Volatility and second-order moments also display an amplification under the learning setup compared with the rational expectations framework.

Suggested Citation

  • Hollmayr, Josef & Kühl, Michael, 2015. "Imperfect information about financial frictions and consequences for the business cycle," Discussion Papers 07/2015, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:072015
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    References listed on IDEAS

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    Cited by:

    1. André, Marine Charlotte & Dai, Meixing, 2017. "Is central bank conservatism desirable under learning?," Economic Modelling, Elsevier, vol. 60(C), pages 281-296.
    2. Hollmayr, Josef & Kühl, Michael, 2016. "Learning about banks' net worth and the slow recovery after the financial crisis," Discussion Papers 39/2016, Deutsche Bundesbank.

    More about this item

    Keywords

    DSGE Model; Financial Frictions; Learning;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G3 - Financial Economics - - Corporate Finance and Governance

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