Research Discussion Papers, Bank of Finland
No 5/2010:
Financial market disturbances as sources of business cycle fluctuations in Finland
Hanna Freystätter ()
Abstract: This paper studies financial market disturbances as
sources of investment fluctuations in Finland during 1995–2008. We
construct a DSGE model of the Finnish economy that incorporates two
domestic financial market shocks and financial frictions in the form of a
BGG financial accelerator. We investigate empirically the importance of
financial market frictions and disturbances by estimating the model using a
Bayesian Maximum Likelihood approach. The empirical evidence points to an
operative financial accelerator mechanism in Finland. Our key result is
that disturbances originating in the financial sector have played a
significant role in the historical variation of investment activities in
Finland. Even allowing for several shocks stemming from both domestic
sources and the international economy, domestic financial market shocks
emerge as key drivers of recent business cycle fluctuations in Finland.
Keywords: financial market disturbances; DSGE models; Bayesian estimation; (follow links to similar papers)
JEL-Codes: E32; E44; F41; (follow links to similar papers)
46 pages, February 21, 2010
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