 Financial frictions and the role of investment-specific technology shocks in the business cycleGunes Kamber, Christie Smith () and Christoph Thoenissen Economic Modelling, 2015, vol. 51, issue C, 571-582 Abstract: Shocks affecting the rate at which investment goods are transformed into capital stock have been identified as a major driver of the business cycle. Such shocks have been linked to frictions in financial markets, because financial markets are instrumental in transforming consumption goods into installed capital. Yet we show that the importance of these investment shocks is greatly diminished when collateral constraints on firms are introduced into an estimated dynamic stochastic general equilibrium model. In the presence of binding collateral constraints, risk premium shocks take on a more prominent role as drivers of the business cycle. Modellers of business cycle fluctuations need to be mindful of the incompatibility of investment shocks and collateral constraints and of the difficulty in specifying ‘structural’ shocks that are robust to modest amendments to the frictions present in a model. Keywords: DSGE model; Financial frictions; Risk premium shocks; Investment specific technology shocks; Bayesian estimation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:51:y:2015:i:c:p:571-582 DOI: 10.1016/j.econmod.2015.09.010 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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