Bayesian Estimation of a DSGE Model with Financial Frictions for the U.S. and the Euro Area

Virginia Queijo ()

No 306, Computing in Economics and Finance 2005 from Society for Computational Economics

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 (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-dge, nep-eec, nep-fmk and nep-mac
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