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

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  • Ferre De Graeve

    (Ghent University)

Abstract

This paper embeds the financial accelerator into a medium-scale DSGE model and estimates it using Bayesian methods. Incorporation of financial frictions enhances the model's description of the main macroeconomic aggregates. The financial accelerator accounts for approximately ten percent of monetary policy transmission. The model-consistent premium for external finance compares well to observable proxies of the premium, such as the high-yield spread. Fluctuations in the external finance premium are primarily driven by investment supply and monetary policy shocks. In terms of recession prediction, false signals of the premium can be given an economic interpretation

Suggested Citation

  • Ferre De Graeve, 2006. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Computing in Economics and Finance 2006 84, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:84
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    More about this item

    Keywords

    financial accelerator; external finance premium; DSGE model; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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