Seminar Papers, Institute for International Economic Studies, Stockholm University
How Important are Financial Frictions in the U.S. and Euro Area?
Abstract: 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.
Keywords: DSGE models; Bayesian estimation; financial accelerator; (follow links to similar papers)
JEL-Codes: C11; C15; E32; E40; E50; G10; (follow links to similar papers)
51 pages, August 1, 2005
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