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How Important are Financial Frictions in the U.S. and the Euro Area?

Virginia Queijo von Heideken

No 223, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper aims to evaluate if frictions in credit markets are important 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) by adding frictions such as price indexation to past inflation, sticky wages, consumption habits and variable capital utilization. When I estimate the model with Bayesian methods, I find that financial frictions are relevant in both areas. According to the posterior odds ratio, the data clearly favors the model with financial frictions both in the U.S. and the Euro area. Moreover, consistent with common perceptions, financial frictions are larger in the Euro area.

Keywords: Financial frictions; DSGE models; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C15 E32 E40 E50 G10 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2008-05-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (17)

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Working Paper: How Important are Financial Frictions in the U.S. and Euro Area? (2005) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0223

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